Impact of United States Economic Policy Uncertainty on Central American Economic Activity: A Bayesian Global VAR Approach
DOI:
https://doi.org/10.62407/maatfce56Keywords:
Central America, International spillovers, Bayesian Global VAR, Economic Policy UncertaintyAbstract
This paper estimates the international transmission of United States economic policy uncertainty to Central American economic activity using a Bayesian Global Vector framework. The empirical model covers twenty-one economies and exploits a trade-weighted network to construct weakly exogenous foreign aggregates. Estimation uses a Minnesota prior with stochastic volatility as the baseline specification and stochastic search variable selection as a robustness check. Posterior inference is based on a large number of draws that pass stability trimming so that generalized impulse response functions and forecast error variance decompositions are constructed from stable posterior trajectories. Results show that a rise in US economic policy uncertainty reduces US industrial activity and that the contraction of US activity operates as the most consistent transmission channel to the Central American economies. The magnitude and persistence of spillovers vary across countries and across prior choices, with SSVS widening posterior uncertainty in selected cases. Policy-relevant implications include strengthening macro fiscal and macro financial buffers and pursuing trade diversification to reduce exposure to external uncertainty. The analysis contributes methodologically by combining a scalable Bayesian GVAR implementation with careful prior and stochastic volatility treatment so that inference on external uncertainty is robust to parameter dimensionality and time-varying volatility.Downloads
References
Abdel-Latif, H., & Popescu, A. (2025, January). Spillovers from large emerging economies: How dominant is China? (Tech. rep. No. 25/27). International Monetary Fund. https://doi.org/10.5089/9798229000529.001
Baker, S., Bloom, N., & Davis, S. J. (2016). Measuring economic policy uncertainty*. The Quarterly Journal of Economics, 131, 1593–1636. https://doi.org/10.1093/qje/qjw024 Banbura, M., Giannone, D., & Reichlin, L. (2010). Large Bayesian vector autoregressions.
Journal of Applied Econometrics, 25, 71–92. https://doi.org/10.1002/jae.1137
Bernanke, B. S. (1983). Irreversibility, uncertainty, and cyclical investment [Accessed via JSTOR]. The Quarterly Journal of Economics, 98 (1), 85–106. http://www.jstor.org/ stable/1885568
Beyer, R. C. M., Ozturk, E. O., Li, C., Misch, F., Chen, R., & Ratnovski, L. (2024). Monetary policy pass-through to interest rates: Stylized facts from 30 European countries (tech. rep. No. WP/24/009). International Monetary Fund. https://www.imf.org/en/Publications/ WP/Issues/2024/01/12/Monetary-Policy- Pass-Through-to-Interest-Rates-Stylized-Facts-from-30-European-Countries-543715
Bhattarai, S., Chatterjee, A., & Park, W.-Y. (2018). Global spillover effects of u.s. uncertainty (Working Paper No. 18/185). Banco de Espana/Bank of Spain. https://www.bde.es/f/webbde/INF/MenuHorizontal/SobreElBanco/Conferencias/2019/Global Spillovers Effects of US Uncertainty.pdf
Bloom, N. (2014). Fluctuations in uncertainty. Journal of Economic Perspectives, 28, 153–
176. https://doi.org/10.1257/jep.28.2.153
Bloom, N. (2009). The impact of uncertainty shocks. econometrica, 77 (3), 623–685.
Boeck, M., Feldkircher, M., & Huber, F. (2022). Bgvar: Bayesian global vector autoregressions with shrinkage priors in R. Journal of Statistical Software, 104 (9), 1–28. https://doi. org/10.18637/jss.v104.i09
Bussi`ere, M., Chudik, A., & Sestieri, G. (2009). Modelling global trade flows: Results from a GVAR model (Working Paper No. 1087). European Central Bank. https://www.ecb.europa. eu/pub/pdf/scpwps/ecbwp1087.pdf
Carriero, A., Clark, T. E., & Marcellino, M. (2013). Bayesian vars: Specification choices and forecast accuracy. Journal of Applied Econometrics, 30, 46–73. https://doi.org/10.1002/ jae.2315
Carvalho Filho, I. d., & Ng, D. (2023). Macroprudential policies in response to external financial shocks (Working Paper No. 23/12). International Monetary Fund. https://www.imf.org/external/pubs/ft/wp/2023/wp2312.pdf
Chudik, A., & Pesaran, M. H. (2016). Theory and practice of GVAR modelling. Journal of Economic Surveys, 30 (1), 165–197. https://doi.org/10.1111/joes.12095
Coronado, S., Martínez, J. N., & Venegas-Martínez, F. (2020). Spillover effects of the us economic policy uncertainty in Latin America. Estudios de Econom´ıa, 47 (2), –. https :
//doi.org/10.4067/S0718-52862020000200273
Cuaresma, J. C., Huber, F., & Feldkircher, M. (2016). Forecasting with Bayesian global vector autoregressive models: Do we gain predictive accuracy? Journal of Forecasting, 35 (8), 652–669. https://doi.org/10.1002/for.2423
de M´exico, B. (2019). Efectos de la mayor incertidumbre en la inversión de negocios de Estados Unidos [Extraído del Informe Trimestral del Banco de México]. Informe Trimestral Abril - Junio 2019, Recuadro 1, 6–8. https://www.banxico.org.mx/publicaciones- y-prensa/informes-trimestrales/%7B8C87C455-6E42-3A99-3A53-B164730B343F%7D.pdf
De Mol, C., Giannone, D., & Reichlin, L. (2008). Forecasting using a large number of predictors: Is Bayesian shrinkage a valid alternative to principal components? [Honoring the research contributions of Charles R. Nelson]. Journal of Econometrics, 146 (2), 318–328. https://doi.org/https://doi.org/10.1016/j.jeconom.2008.08.011
D´ees, S., Mauro, F. d., Pesaran, M. H., & Smith, L. V. (2007). Exploring the international linkages of the euro area: A global var analysis. Journal of Applied Econometrics, 22, 1–38. https://doi.org/10.1002/jae.932
Dees, S., di Mauro, F., Pesaran, M. H., & Smith, L. V. (2005). Exploring the international linkages of the euro area: A global var analysis (Working Paper No. 568) (ECB Working Paper Series No. 568). European Central Bank. https://www.ecb.europa.eu/pub/pdf/ scpwps/ecbwp568.pdf
Doan, T., Litterman, R. B., & Sims, C. A. (1984). Forecasting and conditional projection using realistic prior distributions. Econometric Reviews, 3, 1–100. https://doi.org/10. 1080/07474938408800053
Feldkircher, M., & Tondl, G. (2020). Global factors driving inflation and monetary policy: A global var assessment. International Advances in Economic Research, 26, 225–247. https:
//doi.org/10.1007/s11294-020-09792-2
Feldkircher, M., Huber, F., & Moder, I. (2015). Towards a new normal: How different paths of us monetary policy affect the world economy. Economic Notes, 44 (3), 409–418. https://doi.org/10.1111/ecno.12039
George, E. I., & McCulloch, R. E. (1993). Variable selection via gibbs sampling. Journal of the American Statistical Association, 88 (423), 881–889. https : / / doi . org / 10. 1080 / 01621459.1993.10476353
George, E. I., Sun, D., & Ni, S. (2008). Bayesian stochastic search for var model restrictions. Journal of Econometrics, 142 (1), 553–580. https://doi.org/https://doi.org/10.1016/j. jeconom.2007.08.017
Giannone, D., Lenza, M., & Primiceri, G. E. (2015). Prior selection for vector autoregressions. The Review of Economics and Statistics, 97 (2), 436–451. https : / / doi . org / 10 . 1162 / REST a 00483
Giraldo, C., Giraldo, I., G´omez-Gonza´lez, J. E., & Uribe, J. M. (2025). Us uncertainty shocks, credit, production, and prices: The case of fourteen Latin American countries. Research in International Business and Finance, 78, 103003. https://doi.org/10.1016/j.ribaf.2025. 103003
Hassler, J. A. (1996). Variations in risk and fluctuations in demand: A theoretical model.
Journal of Economic Dynamics and Control, 20 (6), 1115–1143. https://doi.org/10.1016/0165-1889(95)00892-6
Huber, F., & Feldkircher, M. (2017). Adaptive shrinkage in bayesian vector autoregressive models. Journal of Business & Economic Statistics, 37 (1), 27–39. https://doi.org/10. 1080/07350015.2016.1256217
Illes, A., & Lombardi, M. J. (2019). Interest rate pass-through since the financial crisis. BIS Quarterly Review. https://www.bis.org/publ/qtrpdf/r qt1903g.pdf
Imam, P., Ja´come, L. I., & Nier, E. W. (2012). Building blocks for effective macroprudential policies in Latin America: Institutional considerations (Working Paper No. 12/183). International Monetary Fund. https://www.imf.org/external/pubs/ft/wp/2012/wp12183.pdf
International Monetary Fund. (2014). Sustaining long-run growth and macroeconomic stability in low-income countries: The role of structural transformation and diversification (Policy Paper). International Monetary Fund. https://www.imf.org/external/np/pp/eng/ 2014/030514.pdf
International Monetary Fund. (2019, October). Spillovers to Latin America from growth slow-downs in China and the United States (tech. rep. No. October 2019). International Monetary Fund. https://www.imf.org/en/-/media/files/publications/reo/whd/2019/october/ english/spillovers.pdf
Jackson, L. E., Kliesen, K. L., & Owyang, M. T. (2018). The nonlinear effects of uncertainty shocks (Working Paper No. 2018-035) (Available at SSRN: https://ssrn.com/abstract= 3288402). Federal Reserve Bank of St. Louis. https://doi.org/10.20955/wp.2018.035
Jurado, K., Ludvigson, S. C., & Ng, S. (2015). Measuring uncertainty. American Economic Review, 105 (3), 1177–1216.
Kempa, B., & Khan, N. S. (2019). Global macroeconomic repercussions of us trade restrictions: Evidence from a GVAR model. International Economic Journal, 33 (4), 649–661. https://doi.org/10.1080/10168737.2019.1657476
Koop, G., Pesaran, M., & Potter, S. M. (1996). Impulse response analysis in nonlinear multivariate models. Journal of Econometrics, 74 (1), 119–147. https:// doi. org/ https://doi.org/10.1016/0304-4076(95)01753-4
Largaespada, R. A. (2021). Spillovers of us uncertainty shocks to Nicaragua [Master’s thesis]. Pontificia Universidad Católica de Chile, Instituto de Economía [Magíster en Economía]. https://doi.org/10.7764/tesisUC/ECO/61946
Lastauskas, A., Smith, C., & Shirota, A. (2023). Spillover effects of us monetary policy on emerging markets amidst uncertainty [Forthcoming / Preprint available]. https://arxiv. org/abs/2402.07266
Luk, P., Cheng, M., Ng, P., & Wong, K. (2017). Economic policy uncertainty spillovers in small open economies: The case of Hong Kong (Working Paper). Hong Kong Institute for Monetary Research. https://www.policyuncertainty.com/media/HK EPU Paper.pdf
Miescu, M. S. (2023). Uncertainty shocks in emerging economies: A global to local approach for identification. European Economic Review, 154, 104437. https://doi.org/10.1016/j.euroecorev.2023.104437
Mohaddes, K., & Raissi, M. (2020). Compilation, revision, and updating of the global var (gvar) database, 1979q2-2019q4.
Morla, F. (2023). Identificación de los vínculos internacionales de la inflación en República Dominicana y Centroamérica: Un enfoque bayesiano de vectores globales con selección estocástica [Ganador del primer lugar en el Concurso Anual de Economía Biblioteca “Juan Pablo Duarte”, año 2023, organizado por el Banco Central de la República Dominicana].
Organisation for Economic Co-operation and Development (OECD). (2025, June). OECD Economic Outlook: Tackling uncertainty, reviving growth (Economic Outlook No. 117). OECD Publishing. Paris. https://doi.org/10.1787/83363382-en
Orphanides, A., & van Norden, S. (2002). The unreliability of output-gap estimates in real time. The Review of Economics and Statistics, 84 (4), 569–583. https://doi.org/10.1162/ 003465302760193904
Pesaran, H., & Shin, Y. (1998). Generalized impulse response analysis in linear multivariate models. Economics Letters, 58 (1), 17–29. https://doi.org/https://doi.org/10.1016/S0165-1765(97)00214-0
Pesaran, M. H., Schuermann, T., & Weiner, S. M. (2004). Modeling regional interdependencies using a global error-correcting macroeconometric model. Journal of Business & Economic Statistics, 22 (2), 129–162. http://www.jstor.org/stable/1392171
Primiceri, G. E. (2005). Time varying structural vector autoregressions and monetary policy. The Review of Economic Studies, 72, 821–852. https://doi.org/10.1111/j.1467-937x.2005. 00353.x
Superintendencia de Bancos de Panamá. (2025). Informe de actividad bancaria (mayo 2025). https://www.superbancos.gob.pa/analitica/data/otros/IAB en.pdf
Swiston, A. (2010). Spillovers to Central America in light of the crisis: What a difference a year makes (Working Paper No. 10/35). International Monetary Fund. https://www.imf.org/external/pubs/ft/wp/2010/wp1035.pdfTam, P. S. (2018). Global trade flows and economic policy uncertainty. Applied Economics, 50 (34-35), 3718–3734. https://doi.org/10.1080/00036846.2018.1436151
Trung, N. B. (2019). The spillover effects of us economic policy uncertainty on the global economy: A global var approach. The North American Journal of Economics and Finance, 48, 90–110. https://doi.org/10.1016/j.najef.2019.01.017
Downloads
Published
Issue
Section
License
This work is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License.
Under the following terms:
- Attribution — You must give appropriate credit , provide a link to the license, and indicate if changes were made . You may do so in any reasonable manner, but not in any way that suggests the licensor endorses you or your use.
- No additional restrictions — You may not apply legal terms or technological measures that legally restrict others from making any use permitted by the license.
Notices:
You do not have to comply with the license for elements of the material in the public domain or when your use is permitted by an applicable exception or limitation.
No guarantees are given. The license may not grant you all the permissions you need for your intended use. For example, other rights such as publicity, privacy, or moral rights may limit how you use the material.
