Dynamic effects of internal and external policy uncertainty on consumption: exploring with the perspective of trade shares

PurposeMacroeconomic policy shocks have consistently provoked debate across global economies, given their significant effect on economic growth, particularly by affecting markets and employment through changes in consumer behavior. Policymakers need proper abatement measures for both internal and external uncertainties.Design/methodology/approachThe present study aims to analyze the impacts of internal and external policy uncertainty on consumption in 22 countries with their trading shares with each other from 2010q1 to 2021q4. In this regard, for external policy shocks the study constructed an index for each country based on their bilateral trade shares a weighted average of internal policy uncertainty.FindingsBy applying the panel ARDL, a U-shaped relationship between consumption and policy shocks is observed. Further, for the county wise assessment of internal and external policy uncertainty on domestic consumption is assessed and it has shown to be negative in most of countries. Gross effects are also revealed where internal policy shocks have more influence than external policy shocks as countries can diversify external risks from their trade portfolio. Other determinates of consumption like income and exchange rate have positive effects, while interest rate and inflation have negative influences.Originality/valueThe outcomes provide internal and external policy insights for consumption stabilization.