The effect of global economic policy uncertainty on public spending: A perspective on the external debt and shadow economy

Abstract

This study examines the effects of global uncertainty and its associations with each country’s external debt and shadow economy on the government expenditures for a sample of 69 low and middle-income economies. Firstly, a higher external debt and a higher shadow economy reduce the ratio of government consumption to output. Secondly, an increase in the Global Economic Policy Uncertainty decreases government expenditures suggesting a negative effect of uncertainty on public spending in low and middle-income economies. Thirdly, the effect of the global EPU on public spending is weaker in countries with high external debt or shadow economy.