Sovereign uncertainty

Edgar Silgado-Gómez

No 2423, Working Papers from Banco de España

Abstract: This paper investigates the impact and the transmission of uncertainty regarding the future path of government finances on economic activity. I first employ a data-rich approach to extract a novel proxy that captures uncertainty surrounding public finances, which I refer to as sovereign uncertainty, and demonstrate that the estimated measure exhibits distinct fluctuations from macro-financial and economic policy uncertainty indices. Next, I analyse the behaviour of sovereign uncertainty shocks and detect the presence of significant and long-lasting negative effects in the financial and macroeconomic sectors using state-of-the-art identification strategies, within the context of a Bayesian vector autoregression framework. I show that a shock to sovereign uncertainty differs from a macro-financial uncertainty shock originating from disturbances in the private sector —while the former persistently dampens the economy in the medium run, the latter displays a short-lived response in real activity. Lastly, I study the role of sovereign uncertainty in a New Keynesian dynamic stochastic general equilibrium model augmented with recursive preferences and financial intermediaries. I find that a sovereign uncertainty shock in the model is able to capture the empirical slowdowns in economic aggregates if monetary policy decisions are directly influenced by the shock. The model also emphasizes the importance of financial frictions in transmitting the effects of sovereign uncertainty shocks and highlights the minor role played by nominal rigidities.

Keywords: sovereign uncertainty index; government finances; economic activity; event-based identification; Bayesian VARs; non-linear DSGE models (search for similar items in EconPapers)
JEL-codes: C32 E32 E44 E60 (search for similar items in EconPapers)
Pages: 93 pages
Date: 2024-07
New Economics Papers: this item is included in nep-dge and nep-fdg
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https://www.bde.es/f/webbe/SES/Secciones/Publicaci ... 24/Files/dt2423e.pdf First version, July 2024 (application/pdf)

Related works:
Working Paper: Sovereign Uncertainty (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:2423

DOI: 10.53479/36875

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