Economic Policy Uncertainty Shocks in Small Open Economies: A Case Study of Ireland

Abstract

I create a time series of Economic Policy Uncertainty (EPU) for Ireland based on Irish newspaper archives and demonstrate its comovement with other national measures of EPU, such as those available for the US, UK and other euro area countries. I purge the series of its global component and thereby construct the orthogonal domestic component of Irish EPU. I then use a structural vector autoregression to consider the impact of EPU shocks on the Irish economy for the main EPU series and its domestic component. Unanticipated shocks to the Irish EPU series foreshadow declines in investment, consumption, inflation and increases in unemployment. Responses to shocks in the domestic component
of the series are similar (though smaller) for investment and employment, but not for consumption. These findings suggest that: (i) uncertainty relating to economic policy in Ireland is heavily influenced
by foreign events; (ii) unanticipated shocks have real economic effects whether they stem from foreign or domestic developments, and; (iii) firms respond to both foreign and domestic shocks, while households may respond more to global shocks than domestic shocks.