Scandinavian Working Papers in Economics

Working Paper Series,
Sveriges Riksbank (Central Bank of Sweden)

No 334: The timing of uncertainty shocks in a small open economy

Hanna Armelius , Isaiah Hull () and Hanna Stenbacka Köhler
Additional contact information
Hanna Armelius: Ministry of Finance
Isaiah Hull: Research Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
Hanna Stenbacka Köhler: Monetary Policy Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden

Abstract: Foreign measures of uncertainty, such as the US EPU index, are often used as a proxies for domestic uncertainty in small open economies. We construct an EPU index for Sweden and demonstrate that shocks to the domestic index yield di erent impulse response functions for GDP growth than shocks to the US index. In particular, a one standard deviation shock to the Swedish index delivers its maximum impact in the same quarter, lowering GDP growth by 0.2 percentage points. In contrast, a shock to the US index delivers its maximum impact with a one-quarter delay. Other foreign proxies, such as the EU and German indices, also generate e ects that peak with a one-quarter delay.

Keywords: economic uncertainty; policy uncertainty; business cycles; small open economy

JEL-codes: D80; E66; F41; F42

19 pages, December 1, 2016

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