Publication: Policy Uncertainty and Aggregate Fluctuations: Evidence from Emerging and Developed Economies
Date
2023-09-12
ISSN
Published
2023-09-12
Author(s)
Mumtaz, Haroon
Ruch, Franz Ulrich
Abstract
This paper identifies two types of
policy uncertainty measures–government spending and real
interest rates–and their impact on macroeconomic activity in
54 advanced, emerging, and developing economies. Policy
uncertainty is defined as the inability to predict policy
moves, that is, the conditional volatility of policy shocks.
This is achieved in a panel vector autoregression model
which allows, but does not require, the stochastic
volatility of identified shocks to have direct and dynamic
effects on macroeconomic outcomes. It shows that fiscal and
monetary policy uncertainty are damaging to economic
activity and act like negative supply shocks: raising prices
while lowering output, investment and consumption. A one
standard deviation government spending uncertainty shock
decreases real gross domestic product (GDP) by a cumulative
1.0 percentage point and marginally increases inflation
after two years. A one standard deviation real interest rate
uncertainty shock lowers real GDP by a cumulative 1.3
percentage points after two years but raises inflation by
0.5 percentage point.
Link to Data Set
Citation
“Mumtaz, Haroon; Ruch, Franz Ulrich. 2023. Policy Uncertainty and Aggregate Fluctuations: Evidence from Emerging and Developed Economies. Policy Research Working Papers; 10564. © World Bank, Washington, DC. http://hdl.handle.net/10986/40341 License: CC BY 3.0 IGO.”
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