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Tracking Uncertainty through the Relative Sentiment Shift Series

Seohyun Lee () and Rickard Nyman
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Rickard Nyman: University College London, Centre for the Study of Decision-Making Uncertainty

No 2019-12, Working Papers from Economic Research Institute, Bank of Korea

Abstract: We examine the causal dynamic relationship between economic policy uncertainty and economic activities, using a Local Projection model with external instruments. Based on the psychological theory of conviction narratives, we construct a Relative Sentiment Shift (RSS) index and use it as an instrumental variable that captures exogenous variations in economic policy uncertainty. Our empirical results suggest that an increase in economic policy uncertainty induces recessionary pressures in the economy: reductions in production and employment, a sharp stock market downturn, and a constrained financial market.

Keywords: Economic narratives; Algorithmic text analysis; Uncertainty; Dynamic causal effect; Local projection; IV Regression (search for similar items in EconPapers)
JEL-codes: E2 D81 C1 (search for similar items in EconPapers)
Pages: 63 pages
Date: 2019-03-06
New Economics Papers: this item is included in nep-big and nep-mac
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