An economic policy uncertainty index for Portugal

Abstract

This paper investigates the effects of policy uncertainty on major macroeconomic variables in Portugal, employing a Structural Vector Autoregression (SVAR) approach. I develop an Economic Policy Uncertainty (EPU) index utilizing data from over twenty news sources, which captures key moments such as elections, budget negotiations, and various crises. In response to a rise in policy uncertainty, firms delay projects, leading to a decline in industrial output and a rise in unemployment. Consumers, in turn, reduce their non-essential spending, resulting in a gradual decline in retail sales. On the financial side, rising policy uncertainty drives down equity prices and widens credit spreads, reflecting the concerns of investors and lenders.