TIME-VARYING MACROECONOMIC IMPACTS OF GLOBAL ECONOMIC POLICY UNCERTAINTY TO A SMALL OPEN ECONOMY: EVIDENCE FROM INDONESIA
This paper studies macroeconomic impacts of global economic policy uncertainty shocks to a small open economy. To that end, I use monthly Indonesian data along with a measure of global economic policy uncertainty developed by Baker et al. (2016) and Davis (2016) and estimate a time-varying parameter Bayesian structural VAR with non-recursive identification using framework proposed by Canova and Pérez Forero (2015). I find that global economic policy uncertainty shocks lead to a reduction in prices, interest rate, and trade balance in all global events included in the estimation. The impact on output, however, largely varies across events. A surprise movement of global economic policy uncertainty triggers a contraction in output around the 2008 global financial crisis but, following the 2016 US presidential election, output reacts positively to the shock. Despite these notable variations in the responses of output, the proportion of the forecast error variance of output due to the shock is very small and decreases rapidly over time—which indicates that the shock presents an inconsequential effect to output. Nonetheless, the proportion of the forecast error variance of trade balance due to the shock is considerably higher than the forecast error variance of output and inflation. This further suggests that, via international trade, a global economic policy uncertainty shock could still pose harm for Indonesia.
from a Bayesian VAR Model. IMF Working Paper WP/08/46.
Andrle, M., R. Garcia-Saltos, and G. Ho. 2013. The Role of Domestic and External Shocks in
Poland: Results from an Agnostic Estimation Procedure. IMF Working Paper WP/13/220.
Aswicahyono, H. and H. Hill. 2014. Survey of Recent Developments. Bulletin of Indonesian
Economic Studies, 50(3): 319-346.
Baker, S., N. Bloom, and S.J. Davis. 2016. Measuring Economic Policy Uncertainty. Quarterly
Journal of Economics, 131(4): 1539-1636.
Bernanke, B.S. 1986. Alternative Explanations of the Money-Income Correlation. Carnegie-
Rochester Conference Series on Public Policy, 25: 49-99.
Blanchard, O.J., and M.W. Watson. 1986. Are Business Cycles All Alike? in: R.J. Gordon (ed.),
The American Business Cycle, NBER and Chicago Press, 123-179.
Caggiano, G., E. Castelnuovo, J.M. Figueres. Economic Policy Uncertainty Spillovers in Booms
and Busts. Melbourne Institute Working Paper No. 13/17. Online, https://ssrn.com/
Canova, F. and F.J. Pérez Forero. 2015. Estimating Overidentified, Non-recursive, Time-Varying
Coefficients Structural Vector Autoregressions. Quantitative Economics, 6(2): 359-384.
Colombo, V, 2013. Economic Policy Uncertainty in the US: Does it Matter for the Euro Area?
Economics Letters, 121(1): 39-42.
Davis, S. J. 2016. An Index of Global Economic Policy Uncertainty. NBER Working Paper No.
Gauvin, L., C. McLoughlin, and D. Reinhardt. 2014. Policy Uncertainty Spillovers to Emerging
Markets—Evidence from Capital Flows. Bank of England Working Paper No. 512.
Handley, K. 2014. Exporting under Trade Policy Uncertainty: Theory and Evidence. Journal of
International Economics, 94(1): 50.66.
Handley, K., and N. Limão. 2014. Policy Uncertainty, Trade, and Welfare: Theory and Evidence
for China and the U.S. NBER Working Paper No. 19376.
Kim, S. and N. Roubini. 2000. Exchange Rate Anomalies in the Industrial Countries: A Solution
with a Structural VAR Approach. Journal of Monetary Economics, 45: 561-586.
Klößner, S. and R. Sekkel. 2014. International Spillovers of Policy Uncertainty. Economic Letters,
Österholm, P. and J. Zettelmeyer. 2007. The Effect of External Conditions on Growth in Latin
America. IMF Working Paper WP/07/176.
Primiceri, G. 2005. Time-varying Structural Vector Autoregressions and Monetary Policy. Review
of Economic Studies, 72: 821–852.
Sims, C.A. 1986. Are Forecasting Models Usable for Policy Analysis? Minneapolis Federal Reserve
Bank Quarterly Review, 10: 2-16.
Solmaz, S. and M.T. Sanjani. 2015. How External Factors Affect Domestic Economy: Nowcasting
an Emerging Market. IMF Working Paper WP/15/269.
Voss, G.M. and L.B. Willard. 2009. Monetary Policy and the Exchange Rate: Evidence from a
Two-country Model. Journal of Macroeconomics, 31: 708-720.
Unless otherwise indicated, each paper published in The Bulletin of Monetary Economics and Banking. Authors do not need to contact the journal to obtain rights to reuse their own material. They are automatically granted permission to do the following:
- Reuse the article in print collections of their own writing.
- Present a work orally in its entirety.
- Use an article in a thesis and/or dissertation.
- Reproduce an article for use in the author's courses. (If the author is employed by an academic institution, that institution also may reproduce the article for teaching purposes.)
- Reuse a figure, photo and/or table in future commercial and noncommercial works.
- Post a copy of the paper.
- Link to the journal site containing the final edited PDFs created by the publisher.
Unless otherwise indicated, the authors and the journal grant permission to reproduce and distribute for nonprofit educational uses material published in the journal, provided that: (1) in the case of copies distributed in class, students are charged no more than the cost of duplication; (2) the copied work is well identified with a proper notice of copyright affixed to each copy.
Permission to reproduce and to distribute any work published in The Bulletin of Monetary Economics and Banking should be directed to author(s). All such reproduction must identify the author(s), the Journal, the volume, the number of the first page, and the year of the work’s publication in the Journal.