Measuring Economic Uncertainty and Its Effects

Abstract

I construct a monthly index of economic uncertainty for Australia. Economic uncertainty rose to historically high levels during the financial crisis and remained elevated until late 2013. The index is: higher around recessions, elections, monetary policy surprises and some major events; tends to increase faster than it decreases; and is driven by both domestic and foreign factors. I use the index to assess how uncertainty affects the Australian economy. Consistent with the ‘real options’ channel of uncertainty, I find that it reduces investment and employment growth. Similarly, uncertainty raises the household saving ratio, consistent with the ‘precautionary savings’ channel.

Google It Up! A Google Trends-based Uncertainty index for the United States and Australia

“…With respect to them, we develop an uncertainty index also for Australia, focus on the unemployment rate as business cycle indicator given its central role for policymakers, and contrasts the role played by uncertainty shocks with that played by monetary policy shocks, which have been shown to have an in ‡uence on proxies of uncertainty (Pellegrino, 2017). Our contribution is also close to Baker, Bloom, and Davis (2016), who construct an index of economic policy uncertainty (EPU) for a number of countries including the United States and Australia by searching uncertainty-related keywords conditional on a set of widely read country-speci…c newspapers, and to Moore (2017), who constructs an index of economic uncertainty for Australia based on keywords searches conditional on a set of Australian newspapers. 2 We construct novel indices of uncertainty with a similar keyword-related search strategy but conditional on the freely available Google Trends database.…”

Does Monetary Policy Respond to Uncertainty? Evidence from Australia

“…An increase in one standard deviation in economic policy uncertainty significantly increases the odds ratio of an interest rate cut by a multiple of 7.24‐fold (, Model 3) while an increase in Moore ()'s economic uncertainty increases the odds ratio of an interest rate cut by 5.81 (, Model 4). In both Models 4 and 5, macroeconomic conditions also play a significant role, with an increase in business conditions, commodity price growth and a fall in ASX200 growth in the previous month significantly reducing the likelihood of an interest rate cut.…”

A Granular View of the Australian Business Cycle

“…The author constructs an index of aggregate uncertainty for Australia using stock market volatility data. We update the index inMoore () and estimate uncertainty shocks with a recursive VAR approach. In Table we provide detailed descriptive statistics of our full set of control variables.…”

“…(). Finally, we control for aggregate uncertainty following Moore (). The author constructs an index of aggregate uncertainty for Australia using stock market volatility data.…”