Macroeconomic Effects of Uncertainty: A Big Data Analysis for India

Abstract

Uncertainty about the current state and near-term outlook of an economy as well as the likely course of future policy actions can prompt economic agents to alter their decisions to spend, save, invest and hire. In this paper, we construct three alternative indices to measure the level of uncertainty for the Indian economy. The first two uncertainty indices are constructed by applying text mining and natural language processing (NLP) techniques on a dataset compiled from leading Indian business newspapers. The third index is based on internet search intensity data available from Google Trends. Empirical findings from a Local Projections-based econometric framework suggest that uncertainty shocks influence financial markets as well as the real economy in India. Our results indicate that both investment activity and real GDP growth slow down when uncertainty increases in the economy. Such uncertainty indices can help strengthen policy simulation exercises to study the impact of low/high uncertainty scenarios and also improve near-term projection of macroeconomic variables which exhibit high degree of sensitivity to uncertainty.