Is uncertainty the same everywhere? Advanced versus emerging economies

Abstract

Considering the frequency of uncertainty shocks, this study examines various uncertainties across countries. Recent literature shows conflicting evidence on whether these uncertainties are supply- or demand-driven shocks. Using quarterly data from the United States and India, this study shows that although uncertainty shocks are demand shocks in advanced economies (e.g., the United States) with a contractionary output effect, they behave as supply shocks in emerging economies (e.g., India) with an inflationary effect. In contrast to the United States, asymmetry in India results from a high and positive correlation between uncertainty and oil price shocks. This study distinguishes between international and domestic uncertainty for India and finds a significant spillover of international uncertainty. Furthermore, the study shows that domestic uncertainty also relates to the primary sector, where rainfall emerges as a source of domestic uncertainty, thereby contributing to the inflationary effect. Therefore, uncertainty shocks influence monetary policy response differently.

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ORCID for Abhishek Kumar: orcid.org/0000-0002-2259-5506

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