The Bank for International Settlements published a working paper assessing how domestic economic policy uncertainty affects macroeconomic and financial outcomes in Latin America. Using evidence from Brazil, Chile, Colombia and Mexico, it finds that domestic uncertainty shocks disrupt activity and can raise inflation, with the effects resembling a supply-type shock and becoming more severe when the economy is weak or financial conditions are tight. The study uses monthly panel data from 2005 to early 2025 and applies panel local projections, including a specification where domestic economic policy uncertainty is orthogonalised to United States and China uncertainty. A one-standard-deviation rise in domestic uncertainty is associated with a cumulative GDP decline of up to 0.8% after 12 months in the baseline estimates, while orthogonal shocks imply a smaller output drop of around 0.3% and a statistically significant inflation increase of about 0.15 percentage points. Transmission is split between a short-run financial channel, including exchange rate depreciation (around 0.7% on impact) and higher risk premia and volatility, and a real channel marked by weaker one-year-ahead GDP growth expectations (around a 1 percentage point decline) and falling consumer confidence. Quantile results indicate strongly state-dependent effects: growth impacts concentrate in recessionary conditions (up to a 0.8% hit around seven months after the shock at the 10th percentile of growth), while inflation effects appear mainly when inflation is already high (around 25 basis points after six months and 30 basis points after a year at the 90th percentile of inflation). Inflation expectations also move asymmetrically, easing at low percentiles but rising at high percentiles, consistent with increased volatility in expectations under elevated uncertainty.
Bank for International Settlements 2026-01-21
Bank for International Settlements research links Latin American domestic policy uncertainty shocks to lower output and higher inflation
The Bank for International Settlements released a working paper analyzing the impact of domestic economic policy uncertainty on macroeconomic and financial outcomes in Latin America. It finds that uncertainty disrupts activity and can raise inflation, especially when the economy is weak or financial conditions are tight. Using data from Brazil, Chile, Colombia, and Mexico, the study highlights that a one-standard-deviation rise in domestic uncertainty can lead to a GDP decline of up to 0.8% and an inflation increase of about 0.15 percentage points, with effects varying based on economic conditions.