Dynamic linkages between economic policy uncertainty and external variables in Latin America : wavelet analysis

Wavelet coherence analysis (WCA) examines the dynamic interactions between economic policy uncertainty (EPU) in Brazil, Chile, Colombia, and Mexico and key external variables, using monthly data from 2010 to 2022. The findings reveal the following: (i) medium-term co-movements (4-16 months) between EPU and global financial indicators, including the Chicago Board Options Exchange (CBOE) Market Volatility Index (RVIX), Merrill Lynch Option Volatility Estimate Index (RMOVE), and Global EPU Index (RGEPU), emphasizing the sustained influence of financial volatility on domestic policy environments, particularly during global turbulence; (ii) significant interactions between EPU and the Climate Policy Uncertainty Index (RCPU) in resource-dependent economies like Brazil and Colombia, with pronounced effects in medium- and long-term horizons; (iii) bidirectional relationships between Brent crude oil prices (RBRENT) and EPU in Brazil, Colombia, and Mexico, where oil price fluctuations shape policy uncertainty, especially during global market disruptions; and (iv) notable co-movements between EPU and the Dow Jones Sustainability World Index (RW1SGI) in Brazil, Chile, and Mexico, highlighting sensitivity to shifts in sustainability-driven markets. These results underscore the need for economic diversification, strengthened financial safeguards, and integrated climate risk management to mitigate external shocks. By exploring the time-frequency dynamics of global uncertainties and domestic policy environments, this study provides actionable insights for fostering resilience and stability in Latin America’s interconnected economies while addressing vulnerabilities to global market volatility and sustainability transitions.