Abstract:
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.
