Abstract
This paper investigates the effects of a US economic policy uncertainty shock on Indian macroeconomic variables with a number of Structural VARs. This study models the economic policy uncertainty index as constructed by Baker et al. (2013). The study also uses a set of macroeconomic variables for India such as inflation, industrial production and nominal interest rate. The objective of the study is to identify the potential impacts of economic policy uncertainty shocks from the US economy to the Indian economy. According to the SVARs, a one standard deviation shock to the US economic policy uncertainty leads to a statistically significant decline in the Indian industrial production of -0.294% and in the Indian inflation of -0.032%. India shows to be resistant to US policy uncertainty. Furthermore, the study finds that the contribution of the US economic policy uncertainty on the Indian macroeconomic variables is shown to be significantly larger than the one exerted by the Indian uncertainty shock.
Highlights
The role of policy uncertainty has emerged in much of the recent economic debate in the world
This study aims to identify the potential impacts of economic policy uncertainty shocks from the United States (US) economy to the Indian economy
This study investigates whether there are any effects of economic policy uncertainty on real economic activity and if so, how large is the impact of the policy uncertainty shock
Summary
The role of policy uncertainty has emerged in much of the recent economic debate in the world. It is prevalent to find an explicit reference to upside and downside risks to the outlook of international and national institutions The latter takes complex policy decisions into consideration in an environment in which uncertainty about the future state of the economy can never be ruled out. This study aims to identify the potential impacts of economic policy uncertainty shocks from the US economy to the Indian economy. The study is in line with recent research that focuses on the impacts of policy uncertainty shocks on the macro economy. Thereby, providing a correct account of swings in anxiety felt by consumers and investors (Doms and Moris, 2004) It is for this reason that the newspaper coverage index is referred to as the measure of uncertainty
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