Financial vs. Policy Uncertainty in Emerging Market Economies

While the negative effect of uncertainty shocks on the economy is well-known, little is known about the extent to which these e ects di er across the measures of uncertainty, especially in emerging market economies. Using the newly available economic policy uncertainty index from six emerging market economies (Brazil, Chile, China, India, Korea, and Russia), we compare the impact of financial uncertainty shocks|measured by stock market volatility|and that of policy uncertainty shocks on the economy. We find that nancial uncertainty shocks have much larger and more significant impact on output than policy uncertainty shocks, except for China where the government has direct controls over financial markets. While our finding differs from the previous finding that policy uncertainty has no smaller effects on economic activity than nancial uncertainty in advanced economies, it is consistent with the recent emphasis on nancial frictions as a propagation mechanism of uncertainty shocks.