The Impact of Economic Policy Uncertainty on Consumer Confidence in Pakistan

Abstract

This study examines the impact of Economic Policy Uncertainty (EPU) on the consumer confidence index (CCI) in Pakistan. Using a sample from the start of 2012 up to February 2020, a vector error-correction model is used to gauge the impact of EPU on CCI. Our results show that a shock to EPU in Pakistan affects CCI negatively and significantly. The shock persists for a span of more than 20 forecast horizons, informing economic policy makers in Pakistan that sudden changes in the stance without proper communication can deteriorate consumer confidence. This is important as consumer confidence in Pakistan accounts for not only the current economic situation, but expected changes in key macroeconomic variables which is usually a key consideration when forward-looking policies are devised. Our results remain robust to alternate Choleski specifications and lag lengths in the model.