Policy uncertainty acts as supply shock across Latin America
Domestic economic policy uncertainty shocks reduce GDP by up to 0.4 percent and increase inflation by 0.3 percentage points across five major Latin American economies, according to a Banco de España study covering 2005 to 2025.
Two decades of isolated domestic shocks
A study by researchers at the Banco de España, the Bank for International Settlements, and CMN evaluates monthly panel data from 2005 to 2025 across Brazil, Chile, Colombia, Mexico, and Peru.
By isolating domestic policy uncertainty shocks from United States and Chinese spillovers across 1,205 observations, the authors find that an idiosyncratic uncertainty shock reduces monthly real GDP by up to 0.3 percent while increasing headline inflation by 0.13 percentage points.
The baseline non-orthogonal shock causes an even steeper GDP contraction of 0.4 percent after eight months and a 0.3 percentage point rise in inflation, behaving macroeconomic-wise like an adverse supply shock.
Asymmetric damage during economic downturns
The transmission operates via immediate financial friction and persistent real contraction.
Currencies depreciate by up to 3.0 percent over 12 months, while five-year sovereign CDS spreads widen and equity volatility increases in the short term.
Quantile regressions show that these shocks hit vulnerable economies hardest: during downturns, the tenth percentile of GDP growth falls by an additional 0.8 percentage points, while the ninetieth percentile of inflation rises by up to 25 basis points.
Self-inflicted policy paralysis
The paper demonstrates that domestic political noise carries tangible stagflationary costs for emerging economies.
By proving that uncertainty acts as a supply shock, the findings show how policy erraticism paralyses central bank easing.
Predictable governance is not a luxury, but an indispensable macroprudential shield.