Economic policy uncertainty and growth nexus in Pakistan: a new evidence using NARDL model

This study aims to test the symmetric and asymmetric impact of economic policy uncertainty (EPU) on economic growth for the time period 2011M1-2020M5 in Pakistan, using the linear and nonlinear autoregressive distributive lag (ARDL) approach. Unlike other studies, we aim to estimate the impact of uncertainty using the recently developed EPU index by Baker et al. (Q J Econ 131(4):1593-1636, 2016). The nonlinear (NARDL) model results show that positive EPU shocks have a negative impact on short-run economic growth, and the magnitude of positive shocks is greater than the magnitude of negative shocks. The reason is that Pakistan is facing issues like nondiversified sectors, price spikes, political uncertainty, and a weak economic and financial structure. Due to these factors, any adjustment in economic policies creates an unpredictable environment in the country. When uncertainty decreases, economic activity may rebound, but it does not happen instantly. On the basis of the findings of the study, we recommend that there should be political stability in the country and coordination between macroeconomic policies to achieve long-term goals. Moreover, policymakers must play their part in reducing levels of uncertainty by envisaging any future changes in the policy-regulatory environment and maintaining the flexibility to act quickly in the event of a major economic crisis.