The Economic Impact of Fiscal Policy Uncertainty: Evidence from a New Cross-Country Database

Gee Hee Hong, Shikun (Barry) Ke and Anh Nguyen

No 2024/209, IMF Working Papers from International Monetary Fund

Abstract: Fiscal policy uncertainty (FPU)—ambiguity in government spending and tax plans, as well as in public debt valuation—is widely regarded as a source of economic and financial disruptions. However, assessing its impact has so far been limited to a few large economies. In this paper, we construct a novel database of news-based fiscal policy uncertainty for 189 countries. Importantly, we track fiscal uncertainty events that generate global attention that we refer to as the “global fiscal policy uncertainty." This uncertainty has contractionary effects, reducing industrial production in both advanced and emerging market economies, with impacts greater than country-specific fiscal policy uncertainty. Additionally, global fiscal policy uncertainty raises sovereign borrowing costs and generates synchronous movements in the global financial variables, even after accounting for US monetary policy shocks.

Keywords: Fiscal policy uncertainty; news-based uncertainty; propagation of global shocks; VAR; novel database; uncertainty events; impact of Fiscal Policy Uncertainty; FPU index; uncertainty indicator; Industrial production; Debt default; Global (search for similar items in EconPapers)
Pages: 58
Date: 2024-09-27
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