Effects of Economic Policy Uncertainty Shocks on the Macroeconomy and Financial Markets Evidence from Korea

This study analyzes the effects of category-specific economic policy uncertainty (EPU) shocks, which are extracted based on text analysis, on the macroeconomy and financial markets in Korea. The estimation results reveal that the effects appear to be distinct, depending on the type of EPU shocks. Shocks to monetary policy uncertainty (MPU) and foreign exchange policy uncertainty (FXPU) lead to a decrease in real GDP, employment, and stock prices, and a depreciation of the Korean won. Shocks to fiscal policy uncertainty (FPU) affect the macroeconomy and financial markets to a less extent. However, shocks to trade policy uncertainty (TPU) appear to have little impact on the Korean markets. Taking into account to the estimation results, it would be recommended for policymakers to focus more on reducing MPU and FXPU since shocks to MPU and FXPU may lead to a decrease in real GDP and employment and the heightened volatility in equity and FX markets.