Global Versus Domestic Uncertainty: Implications for Inflation and Financial Conditions

This paper investigates how global and domestic uncertainty shocks dynamically affect inflation and financial conditions across twenty diverse economies. Based on country-specific structural vector autoregression models with monthly data from 2009 to 2025, the empirical findings reveal substantial cross-country heterogeneity. Global uncertainty predominantly acts as a deflationary shock that systematically eases domestic borrowing costs, whereas domestic uncertainty produces more localized and muted effects. Second-stage cross-country regressions demonstrate that structural characteristics dictate the severity of these shocks. Notably, fixed exchange rate regimes yield a positive structural coefficient, indicating they act as a buffer that significantly weakens the baseline deflationary pass-through of global uncertainty compared to flexible regimes. The analysis also uncovers a positive alignment between the responses of inflation and interest rates, providing evidence that financial markets systematically tighten borrowing conditions in response to inflationary uncertainty and ease them in response to deflationary uncertainty.