Economic Policy Uncertainty and Income Inequality across Europe

This paper investigates the impact of Economic Policy Uncertainty (EPU) on income inequality across a broad set of European countries from 1995 to 2022, with a particular focus on the core-periphery divide. Applying both time series and panel data methodologies—including Vector Autoregressions (VAR), panel VAR, and local projections—we assess how economic uncertainty influences inequality dynamics. Our findings reveal three key insights. First, uncertainty shocks significantly affect income inequality in nearly all countries, and the effect is time-varying. Second, the effect is heterogenous across countries but varies: uncertainty tends to reduce inequality in core European countries such as Belgium, Germany, Ireland, and the Netherlands, while mainly increasing it in periphery and intermediate countries like France, Greece, Italy, and Spain. Third, panel analysis confirms this asymmetry, showing more persistent and positive inequality effects in periphery countries. These results suggest that income inequality in Europe’s periphery is more vulnerable to economic uncertainty, underscoring the importance of stable policy environments and targeted fiscal responses.