The Macro-Financial Impact of Economic Policy Uncertainty in Latin America

Abstract

This paper investigates the impact of domestic economic policy uncertainty (EPU) on macroeconomic and financial variables in emerging market economies, focusing on Latin America. Using panel data for Brazil, Chile, Colombia, Mexico and Peru from 2005 to early 2025, we find that domestic EPU shocks cause significant macroeconomic disruptions, leading to a contraction in output and a rise in inflation, akin to a supply shock. These effects are transmitted through a financial channel in the short term, via higher risk premia, increased equity market volatility and exchange rate depreciations, and through a real channel in the medium term, via declines in growth expectations and consumer and business confidence. Our analysis further reveals that EPU shocks aggravate episodes of weak economic conditions and tighter financial conditions, while stronger economies are better able to absorb such shocks.