The impact of economic policy uncertainty and political instability on macroeconomic variables

Uncertainty in the science of economics has been protecting its place as a concept still discussed despite many theoretical developments. The factor lying behind the discussion of uncertainty to this extend is based not on the fact that semantic criteria of the concept of uncertainty in abstract economic thought could not be conceptualized but on the fact that consensus on the concept of uncertainty could not be constituted. Absence of the consensus on uncertainty also caused to the emergence of the different approaches toward this concept. In this study, owing to the fact that it is stronger and also includes political factors, economic policy uncertainty (EPU) index of Baker, Bloom ve Davis (2015), developed for the USA, shall be used. Along with EPU, political instability indicators of the developing countries shall be taken into account. In the study, using 17 political instability indicators through exploratory factor analysis, three factors of political instability has been detected. These factors are violence and tension, government opposition and protest, and instability inside the regime. Using dynamic panel system generalized method of moments, the effects of political instability in developing countries and EPU in the USA on the macroeconomic variables of developing countries have been examined. Results of the study indicate that EPU in the USA and three factors of political instability in developing countries have different effects on inflation rate and foreign direct investment, while they have a strong and negative effect on growth rate in the developing countries. Keywords: Economic policy uncertainty, Political instability, Inflation, Growth, Foreing direct investments.