This paper aims to explore the short- and long-term influences of climate, economic and monetary policy uncertainties on USA business sentiment behavior.
We start our analysis by removing potential influences of various significant factors from the sentiment time series, using an orthogonalization procedure. Subsequently, we assess the response of the filtered sentiment series, generated in the initial step, to the dynamics of climate, economic and monetary policy uncertainties employing the dynamic simulations of the autoregressive distributed lag model.
The results reveal that business sentiment is negatively associated with both climate and economic policy uncertainties (monetary policy uncertainty) across short- and long-term horizons (solely in the long run). Furthermore, economic policy uncertainty stands out as the predominant factor affecting business sentiment compared to the other types of uncertainty in both short- and long-term assessments.
Given their negative impacts on USA business sentiment in both short and long terms, policymakers should prioritize providing clear and stable frameworks and guidelines related to climate and economic policies. Enhancing clarity, predictability and transparency in these policies can potentially improve business sentiment and stimulate a more favorable environment for investments and business activities.
Building on established evidence that policy uncertainty affects sentiment, we contribute to the literature by jointly examining climate, economic and monetary policy uncertainty within a unified framework and by extracting the uncertainty-driven component of USA business sentiment. Combining an orthogonalization approach with dynamic autoregressive distributed lag simulations enables a more transparent and integrated assessment of how uncertainty effects evolve over time, thereby complementing extant short- and long-run evidence.
