evidence of negative relationship b

evidence of negative relationship between uncertainty and economic growth. Using data from 93 countries, Antonio Fatas and Ilian Miho (2011) also documents that one-standard-deviation increase in policy volatility reduces long-term economic growth by about 0.74% in a panel regression; this outcome provide broad cross country evidence in support of the view that policy volatility exerts significant negative impact on economic growth.
The dynamic relationship between policy uncertainty and interest rates however, is not as clear cut as other variables employed in this study in reviewed literature. Empirical studies on how policy uncertainty ultimately impact interest are few and far between. However, sparse evidence of how specific source of policy uncertainty influences interest rate suggests that the likelihood of relatively high interest rate as a result of heightened policy uncertainty is more plausible than the reverse condition. For instance, Junko Koeda & Ryo Kato, (2010) finds that heightened monetary policy uncertainty raises both medium and long-term interest spread, which adversely affects investment growth in the process. This study projects that policy uncertainty could foster general economic uncertainty forcing lenders to increase interest rate to compensate for perceived risk in the market place. In such condition, policy uncertainty will lead to interest rates hikes depending on how lenders interpret the condition. Additionally, this study further propose that all things being equal; policy uncertainty will dampen consumer sentiments and impact negatively on consumption expenditure which accounts for about 70% of US GDP growth according to BEA.
3. MODELING POLICY UNCERTAINTY
In this modified model, RPC ratio greater than one reflects relatively high political capacity to implement and sustain current and future policies and contracts critical for economic growth and development. The condition also indicates the government is highly successful in extracting and managing resources such as taxes, to support its policies. Budget surplus in this case boost confidence in the government and its ability to promote growth augmenting policies, a condition which helps reduces uncertainty for current and potential investors. RPC ratio less man one however, generate anxiety about growing deficits and ability of the government to successfully implement expected policies. Persistently low RPC ratio is thus perceived as growing weakness on the part of the government to sustain ongoing programs or policies.