Understanding Uncertainty Shocks in Uruguay Through VAR Modeling

Abstract

This study introduces a first set of uncertainty indexes for Uruguay (a newspaper-based index and a composite index-based) to analyze how economic uncertainty impacts domestic variables in a small and open economy such as Uruguay, which is exposed to international, regional, and local uncertainty. The analysis covers approximately 15 years and uses the vector autoregressive methodological framework. The main findings suggest that economic uncertainty significantly impacts the real economy and does not impact the nominal variables. These findings which differentiate from other results found in the empirical literature, can be associated with the stability of the Uruguayan economy and the strong institutions, which may help mitigate external shocks. To assess the capability of the proposed uncertainty model to predict macroeconomic variables, we evaluate its predictive performance within the last major uncertainty shock due to the COVID-19 pandemic.

Uncertainty and Business Cycle: An Empirical Analysis for Uruguay

“…First, it is a small and open economy located in South America between two large, highly volatile economies, Argentina and Brazil, with which it forms Mercosur. For this economy, the dynamic and influence of uncertainty on the economy are studied in [18,19], using different methods and measures. Ref.…”

“…Ref. [18] proposed a composite index measure of macroeconomic uncertainty that, following the methodology of [20], combines external uncertainty captured by Brazil's Economic Political Uncertainty (EPU) index (Fundação Getúlio Vargas) and the Global index (Baker, Bloom, and Davis), with domestic uncertainty measured as the standard deviation of 12-month exchange rate forecasts collected by the Central Bank of Uruguay (BCU). On the other hand, Ref.…”