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Policy Uncertainty and Aggregate Fluctuations: Evidence from Emerging and Developed Economies

Year: 2025

Type: article

Abstract: This study estimates 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 points.

Source: The World Bank Economic Review

DOI: 10.1093/wber/lhaf023

Authors: Haroon Mumtaz, Franz Ulrich Ruch

Institution: Queen Mary University of London

Language: English

Topic: Market Dynamics and Volatility

Subfield: Economics and Econometrics

Field: Economics, Econometrics and Finance

Domain: Social Sciences

SDG: Decent work and economic growth

Open Access status: hybrid

Estimated APC paid: $3,986