Macroeconomic effects of uncertainty: a Google trends-based analysis for India

Bhanu Pratap () and Nalin Priyaranjan ()
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Bhanu Pratap: Reserve Bank of India
Nalin Priyaranjan: Reserve Bank of India

Empirical Economics, 2023, vol. 65, issue 4, No 4, 1599-1625

Abstract: Abstract This study proposes a new high-frequency indicator to measure economic policy uncertainty in the context of India, a large emerging market economy. Based on internet search intensity data, the proposed index tends to peak around domestic and global events associated with uncertainty that may prompt economic agents to alter their decisions to spend, save, invest and hire. Using an external instrument with structural vector autoregression (SVAR-IV) framework, we provide fresh evidence on the causal impact of uncertainty on the Indian macroeconomy. We show that surprise increases in uncertainty lead to a fall in output growth and an increase in inflation. This effect is found to be mainly driven by a fall in private investments vis-à-vis consumption indicating a dominant supply-side impact of uncertainty. Lastly, taking the case of output growth, we show that adding our uncertainty index to standard forecasting models leads to better forecasting accuracy compared to other alternate indicators of macroeconomic uncertainty.

Keywords: Macroeconomy; Google trends; Economic policy uncertainty; Uncertainty shocks; Forecasting (search for similar items in EconPapers)
JEL-codes: C31 C55 E22 E32 G18 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s00181-023-02392-z

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