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.
Authors
- DOI
- https://doi.org/10.5089/9798400288128.001
- ISBN
- 9798400288128
- ISSN
- 1018-5941
- Issue
- 209
- Pages
- 58
- Published in
- United States of America
- Series
- Working Paper No. 2024/209
- Stock No
- WPIEA2024209
- Volume
- 2024
Table of Contents
- Hong_Ke-Nguyen_Fiscal_Policy_Uncertainty_published.pdf -1
- Introduction 4
- News-Based Fiscal Policy Uncertainty Index 8
- Construction of News-Based Fiscal Policy Uncertainty Index 8
- Validation of the Index 10
- Country-Level and Global Fiscal Policy Uncertainty Indexes 10
- Economic Impact of Fiscal Policy Uncertainty: VAR-based Analysis 22
- Baseline results 22
- Alternative identifications 24
- Alternative Cholesky decomposition 24
- Sign Restrictions 24
- Extensions 26
- Cross-Country Spillover Effects: Country-Specific FPU vs. Global FPU 28
- Financial Impact of Fiscal Policy Uncertainty 31
- Conclusion and Policy Implications 33
- Appendices 38
- List of countries 38
- Data Description 41
- News Sources used in constructing FPU 42
- Search queries 43
- Number of Articles and Geographical Coverage by News Outlets 44
- Prompt for Large-Language Model to Generate Fiscal Policy Uncertainty Indicator 45
- Prompt for Large-Language Model to Generate Fiscal Policy Uncertainty Indicator: United Kingdom 46
- Country-Level FPU examples with narratives 47
- Sign Restrictions with Narrative and Bounded Share 49
- Extensions 50
- Pre-COVID sample 50
- Full sample without special treatment for the COVID-related extreme observations 51
- Controlling for the Global Economic Policy Uncertainty 52
- Robustness Checks with Different Lag Structure 53
- Using two lags 53
- Using four lags 54
- Using six lags 55
- Financial Markets 56
