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The macro-financial impact of economic policy uncertainty in Latin America

Author

Listed:
  • Ana Aguilar
  • Rafael Guerra
  • Carola Müller
  • Alexandre Tombini

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 a panel dataset for Brazil, Chile, Colombia and Mexico 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 are most damaging when the economy is weak or financial conditions are tight, while stronger economies are better able to absorb such shocks.

Suggested Citation

  • Ana Aguilar & Rafael Guerra & Carola Müller & Alexandre Tombini, 2026. "The macro-financial impact of economic policy uncertainty in Latin America," BIS Working Papers 1324, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:1324
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    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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