The Macroeconomic Effects of Uncertainty Shocks in India

The macroeconomic response to uncertainty for India is studied in a structural model that decomposes uncertainty into negative and positive contributions. The results show that uncertainty shocks reduce industrial production, lead to an exchange rate depreciation, lowers prices and increases interest rates. Conversely, a reduction in uncertainty (or an increase in negative uncertainty) increases industrial production, reduces prices, leads to an exchange rate appreciation and slightly increases interest rates. The results, however, reveal that the response to uncertainty is insignificant - this implies that the short run duration and sign could be different.