Economic policy uncertainty and industrial output in the G7 countries: an asymmetric analysis

This study examines the asymmetric effects of economic policy uncertainty (EPU) changes on industrial production in G7 countries using monthly data from 1985 to 2024 and applying a nonlinear autoregressive distributed lag (NARDL) model. While the linear ARDL model finds limited evidence of long-run effects—only Germany shows cointegration—the NARDL model reveals significant short- and long-run asymmetries across all G7 nations. Rising EPU consistently hurts industrial production, whereas declining EPU boosts it. The negative effects of rising EPU are particularly pronounced in France, Italy, and Japan, while Canada, Germany, the UK, and the U.S exhibit stronger positive responses to declining EPU. These asymmetric effects remain robust even after accounting for nonlinearities in control variables such as oil prices, interest rates, and exchange rates. The findings highlight the need for policymakers to recognize that EPU changes do not affect the economy symmetrically. Proactive strategies, including clearer policy communication, fiscal stimulus, accommodative monetary policies, and supply chain diversification, are needed to mitigate the adverse effects of rising EPU and to support industrial resilience. Moreover, country-specific variations suggest that differences in economic structure, policy environments, and institutional strength play a role in shaping these responses. Overall, the study emphasizes the importance of managing EPU to sustain industrial output and economic stability in advanced economies.