Economic Policy Uncertainty in Small Open Economies, a Case Study of Ireland

The main contribution of this paper is the construction of a measure of Economic Policy Uncertainty (EPU) for Ireland, following the methodology of Baker, Bloom and Davis (2016). The paper also sheds light on the implications of heightened uncertainty for Ireland, a small open economy operating within monetary union. Exogenous domestic uncertainty shocks foreshadow persistent declines in Irish investment and employment, with no clear response by the ECB. On the other hand, no such decline in demand is observed following global uncertainty shocks, largely resulting from an accommodative monetary policy stance by the ECB. Results from this paper suggest that policy uncertainty shocks have negative and persistent effects on Irish real economic activity, only when interest rates do not react, or are constrained. Common identification problems in the literature are also discussed and suggestions are made for future work in the area.