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How economic policy uncertainty spreads across borders: the case of Latin America

Author

Listed:
  • Erik Andres-Escayola

    (UNIVERSITY OF ALICANTE)

  • Luis Molina

    (BANCO DE ESPAÑA)

  • Javier J. Pérez

    (BANCO DE ESPAÑA)

  • Elena Vidal

    (BANCO DE ESPAÑA)

Abstract

Latin America’s growth has been hindered by institutional instability and volatile economic policies, often driven by political cycles. These shifts generate uncertainty that deters investment and disrupts productivity. We analyze this phenomenon using Economic Policy Uncertainty (EPU) indices, assessing their impact on domestic macroeconomic variables via regional spillovers - spurred by regional proximity - and also considering the global transmission of EPU shocks to key trade and financial partners. To do so, we assemble a comprehensive and comparable database of EPU indices for the region: first, we construct new indices for Bolivia, Ecuador, Paraguay, Uruguay and Venezuela, and second, we update the ones available in other papers for Argentina, Brazil, Chile, Colombia, Mexico and Peru using a comparable methodology. Our results show that: (i) regional EPU shocks reduce regional GDP growth, deter capital inflows and spark exchange rate instability; (ii) Brazil and Mexico are key sources of uncertainty spillovers within the region; and (iii) EPU shocks in Latin America affect financial and real variables in major partner economies, with Spain being particularly exposed.

Suggested Citation

  • Erik Andres-Escayola & Luis Molina & Javier J. Pérez & Elena Vidal, 2025. "How economic policy uncertainty spreads across borders: the case of Latin America," Working Papers 2549, Banco de España.
    • Handle: RePEc:bde:wpaper:2549
    DOI: https://doi.org/10.53479/41984
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    JEL classification:

    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development

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