Empirical Study Reveals Favourable Government Policy Brings Significant Positive Influence to the Economy

The relationships between government policy, economic growth and financial markets have been a long-standing and challenging question in economic and finance. While the traditional researches mainly focus on the effect from a particular fiscal or monetary policy to the economy, Dr. Yang Liu, Assistant Professor in Finance, HKU Business School and Dr. Ivan Shaliastovich, Associate Professor in Finance, Wisconsin School of Business have taken a novel approach in their recent research by considering the real-time public assessments of the presidential job performance in 49 years, providing a more comprehensive and in-depth analysis to evaluate the influence of favourable policy to the local economy.

The study by the two scholars proves there are strong relationships between the public rating for policy and exchange rate, as well as economic growth. This important finding facilitates better prediction on future exchange rate and the economic trends based on the public views on recent policy. “We have collected the data from January 1971 to December 2019 from Gallup Analytics to measure the monthly presidential policy approval ratings in the US. These figures have been compared with asset price and macroeconomic data of the US, as well as a panel of foreign countries to calculate the correlation coefficient in different horizons, to estimate their relationships and predict future trends,” said Dr. Yang Liu.

The research finds that, favourable assessments of US government policy is associated with future growth rates in productivity, total output, consumption, investment, exports & imports as well as government expenditures. The effect on consumption is significant and valid for a long period of time, whereas on industrial production and GDP lasts for up to three years. For aggregate productivity and imports, the effect still shown up to one year. In other words, high approval ratings predict a persistent increase in future economic activity and an expansion in public outlays on intangible determinants of productivity and growth. According to the research, the high ratings in policy also lead to a reduction in economic uncertainty and volatility (base on factors including unemployment, inflation and other assets price variables) at longer horizons beyond one year.

In addition, government policy approval ratings are strongly related to the dollar value. The study evaluates the effect on the change of approval ratings against the change of the value of USD to 1) all available currencies, 2) only the currencies of developed countries (G10) and 3) currencies of the developing economies. The result shows that all the three types of dollar indexes have a correlation coefficient of 0.4 – 0.5 with policy ratings in 2 – 5 years horizons. “While a coefficient of 1 means a perfect positive relationship and 0 refers to no relationship, a correlation coefficient of around 0.5 has indeed indicated a relatively strong relationship between the two factors.” Dr. Liu explained. “The statistics also show that highly-rated policy imply a significant decline in future dollar exchange rates and excess currency returns in several years along the road.”

“Our study indicates the importance of implementing favourable policy by the government, which will create positive influence to the society and the economy,” Dr. Liu further elaborated. “It also provides additional information for the public to estimate future exchange rate and economic situation prior to investment decision making. In future, a more profound study can be made to investigate the connection between approval ratings and government policies beyond the ex-defense government expenditures and extend the empirical evidence to other countries and other types of financial assets.”

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