The Timing of Uncertainty Shocks in a Small Open Economy
Sveriges Riksbank Working Paper Series No. 334
12 Pages Posted: 7 Mar 2017 Last revised: 12 Dec 2020
Date Written: December 1, 2016
Foreign measures of uncertainty, such as the US EPU index, are often used as a proxies for domestic uncertainty in small open economies. We construct an EPU index for Sweden and demonstrate that shocks to the domestic index yield different impulse response functions for GDP growth than shocks to the US index. In particular, a one standard deviation shock to the Swedish index delivers its maximum impact in the same quarter, lowering GDP growth by 0.2 percentage points. In contrast, a shock to the US index delivers its maximum impact with a one-quarter delay. Other foreign proxies, such as the EU and German indices, also generate effects that peak with a one-quarter delay.
Keywords: Economic Uncertainty, Policy Uncertainty, Business Cycles, Small Open Economy
JEL Classification: D80, E66, F41, F42
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