Abstract
AbstractThis article investigates the impact and transmission of uncertainty regarding the future path of government finances on economic activity. Employing a data‐rich approach, I introduce a novel proxy that captures uncertainty surrounding public finances, which I refer to as sovereign uncertainty. In an application to Spain, sovereign uncertainty shocks persistently dampen the economy in the medium run, whereas macro‐financial uncertainty shocks originating in the private sector induce a negative short‐lived response in real activity. In addition, a New Keynesian model rationalizes the empirical results, emphasizing the role of financial frictions and monetary policy decisions in transmitting the effects of sovereign uncertainty shocks.
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