Economic Policy Uncertainty in Central America and the Dominican Republic

The advent of Big Data and computational tools has transformed macroeconomic analysis, introducing real-time, high-frequency text-based indicators such as the economic policy uncertainty (EPU) index pioneered by Baker et al. (2016). However, constructing the EPU index for developing economies remains a challenge, mostly due to limited press coverage. Our study focuses on the Central American region, comprising Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, Panama, and the Dominican Republic (CAPARD). We construct country-specific EPU indices using a combination of local and regional sources and validate them using the narrative approach in order to ensure variation accurately reflects relevant economic policy events. We offer further empirical validation by computing impulse response functions for key macroeconomic variables at both the country and regional levels. We show that EPU shocks lead to a decline in economic activity, foreign direct investment (FDI), and tourism levels. Our findings underline the importance of EPU monitoring in Central America and offer a solution through our indices.