Uncertainty in economic policy and financial markets

Abstract

Concerns about political uncertainty have been intensified especially in the wake of the explosion of the global financial crisis, the successive crises in the Eurozone and the successive changes in the political directions of many of the world's major countries and states that have come as a result of these events (Baker et al., 2016). Many political events such as the independence process in Catalonia can shake the political guidelines of a region or an entire country, causing instability and uncertainty to the agents who control the business processes and financial activities of a country. The distrust of consumers and investors in times of political crisis can shake the macroeconomic variables that define the economic health of a country or territory. Government economic policies such as fiscal, monetary or regulatory policies have very broad effects on economic territory. Economic agents such as companies make the real decisions in the market on a daily basis. These decisions are based on economic expectations for the short and medium term. For this reason, policies have a considerable influence on the decision-making of these economic agents, who have an indirect influence on the economic drift in this short and medium term scale. This paper will analyze the uncertainty in economic policy and its influence on the behavior of financial markets. Through a conceptual and state of the art analysis of different indicators with which the level of political instability can be quantified, the correlation of this with confidence indicators and subsequent fluctuations in the markets will be evidenced. After this preliminary theoretical analysis, the particular case of the independence process in Catalonia will be analysed, highlighting the relevant politicaleconomic events that have taken place and how this process has gone hand in hand with important economic fluctuations.