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

Ana Aguilar, Rafael Guerra, Carola Müller and Alexandre Tombini

No 1324, BIS Working Papers from Bank for International Settlements

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.

Keywords: macroeconomy; uncertainty; economic policy uncertainty; Latin America (search for similar items in EconPapers)
JEL-codes: C33 D80 E23 E31 (search for similar items in EconPapers)
Date: 2026-01
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