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Economic Policy Uncertainty in Central America and the Dominican Republic

Author

Listed:
  • Marina Diakonova

    (Banco de España)

  • Corinna Ghirelli

    (Banco de España)

  • Juan Quiñónez

    (CENTRAL AMERICAN MONETARY COUNCIL (SECMCA))

Abstract

The advent of Big Data and computational tools has transformed macroeconomic analysis, introducing real-time, high-frequency text-based indicators such as the economic policy uncertainty (EPU) index pioneered by Baker et al. (2016). However, constructing the EPU index for developing economies remains a challenge, mostly due to limited press coverage. Our study focuses on the Central American region, comprising Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, Panama and the Dominican Republic (CAPADR). We construct country-specific EPU indices using a combination of local and regional sources and validate them using the narrative approach in order to ensure variation accurately reflects relevant economic policy events. We offer further empirical validation by computing impulse response functions for key macroeconomic variables, at both country and representative country level. We show that EPU shocks lead to a decline in economic activity, foreign direct investment (FDI) and tourism levels. Our findings underline the importance of EPU monitoring in Central America and offer a solution through our indices.

Suggested Citation

  • Marina Diakonova & Corinna Ghirelli & Juan Quiñónez, 2024. "Economic Policy Uncertainty in Central America and the Dominican Republic," Occasional Papers 2426, Banco de España.
    • Handle: RePEc:bde:opaper:2426e
    DOI: https://doi.org/10.53479/37524
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    References listed on IDEAS

    as
    1. Andres Algaba & David Ardia & Keven Bluteau & Samuel Borms & Kris Boudt, 2020. "Econometrics Meets Sentiment: An Overview Of Methodology And Applications," Journal of Economic Surveys, Wiley Blackwell, vol. 34(3), pages 512-547, July.
    2. Scott R. Baker & Nicholas Bloom & Steven J. Davis & Stephen J. Terry, 2020. "COVID-Induced Economic Uncertainty," NBER Working Papers 26983, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    economic uncertainty; economic policy uncertainty; text-based indicators; uncertainty shocks;
    All these keywords.

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E66 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General Outlook and Conditions

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