The Impact of Economic Policy Uncertainty on Mexican Economic Activity and Stock and Currency Markets: A DCC Approach

We analyze the impact of local and American economic policy uncertainty on economic and financial activity in Mexico, employing monthly data over the period from January1996 to September 2019. To achieve this purpose, a dynamic conditional correlation analysis is proposed. Results indicate that local economic policy uncertainty (EPU) has a significant impact on financial variables (stock and currency markets) but not on economic variables (economic activity and industrial production). This result could be explained by the fact that financial factors are very sensitive and more dynamic than economic factors, the latter taking longer to change. On the contrary, the American EPU does not have a significant impact on real and financial Mexican variables. This is evidence of the greater response of Mexican economic and financial variables to local uncertainty, compared to international stress..