Publication: Policy Uncertainty and Aggregate Fluctuations: Evidence from Emerging and Developed Economies
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2023-09-12
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2023-09-12
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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.
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“Mumtaz, Haroon; Ruch, Franz Ulrich. 2023. Policy Uncertainty and Aggregate Fluctuations: Evidence from Emerging and Developed Economies. Policy Research Working Paper; 10564. © World Bank. http://hdl.handle.net/10986/40341 License: CC BY 3.0 IGO.”
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