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Macroeconomic effects of uncertainty shocks: Evidence from Korea

Dooyeon Cho and Husang Kim

Journal of Asian Economics, 2023, vol. 84, issue C

Abstract: This paper proposes a new measure of economic policy uncertainty (EPU) for Korea by fine-tuning the keywords and exploiting information drawn from a wide variety of local newspapers. The uniqueness of our new EPU index lies mainly in the fact that it uses a set of keywords that correspond much more closely to actual language use and better reflect the economic environment of Korea, which is classified as a small open economy. After shocks to EPU being identified, we employ these shocks to estimate the impulse responses using local projections. Unlike the existing measure, our results show that shocks to EPU lead to a significant decline in macroeconomic aggregates such as output, consumption, investment, and employment. Thus our results suggest a refinement of the EPU index in general for other countries accordingly. We also develop policy-specific uncertainty indices and show that they capture important historical events related to the corresponding policies, such as monetary and fiscal measures.

Keywords: Economic policy uncertainty; Uncertainty shocks; Local projections (search for similar items in EconPapers)
JEL-codes: C43 E32 E66 G18 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1016/j.asieco.2022.101571

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