Numerous studies have analyzed the effect of uncertainty on real macroeconomic variables that drive the business cycle, but a much smaller share have examined its effects in emerging economies. This paper uses a panel vector autoregression (PVAR) model to analyze the effect of economic policy uncertainty in Latin America. The results suggest that, in small open economies, an uncertainty shock has negative effects on the region’s economic performance. Greater uncertainty could lead to first-quarter declines of between 1.72% and 2.85% in investment, between 0.49% and 0.65% in consumption, between 0.29% and 0.51% in output, and between 0.05% and 0.17% in employment. These results are consistent with evidence that greater uncertainty is associated with the postponement of investment, consumption, and hiring decisions, dampening economic growth.
