The effect of economic policy uncertainty index on the Indian economy in the wake of COVID-19 pandemic

Abstract

PurposeThe paper tries to analyse empirically the impact of India's economic policy uncertainty (EPU) index on different macro-economic variables of India, like import, export, interest rate, exchange rate, inflation rate and stock market during pre-COVID-19 and COVID-19 era.Design/methodology/approachAlthough there exist several works where relationship and volatility among the stock markets and macro-economic indicators during the COVID-19 pandemic have been estimated, but till now none of the studies examined the effect of EPU index on different macro-economic variables in the Indian context along with the stock market due to the outbreak of COVID-19 pandemic. This is considered a noteworthy gap and hence opens up a new dimension for examination. To get a clear picture, monthly data from January, 2012 to September, 2021 have been considered where January, 2012–February, 2020 is taken as the pre-COVID-19 period and March, 2020–September, 2021 as COVID-19 period. All the data are converted into log natural. The authors applied DCC-GARCH model to investigate the impact of EPU index on volatility of selected variables over the study period across a multivariate framework and Markov regime-switching model to examine the switching over of the variables.FindingsThe results of dynamic conditional correlation - multivariate generalized autoregressive conditional heteroskedasticity (DCC-MGARCH) model indicates the presence of volatility in the dependent variables arising out of economic policy uncertainty considering the segmentation of the study period into pre-COVID-19 and COVID-19. The results of Markov regime-switching model show the variables make a significant move from low-volatility regime to high-volatility regime due to the presence of COVID-19.Research limitations/implicationsIt can be implied that impact of EPU in terms of volatility on the Indian Stock Market will lead to unfavourable investment conditions for the prospective investors. Even, the different macro-economic variables are to suffer from the volatility arising out of EPU across a long time horizon as confirmed from the DCC-MGARCH model.Originality/valueThe study is original in nature. It adds superior values from the new and significant findings from the study empirically. Application of DCC-MGARCH model and Markov regime switching model makes the study an innovative one in terms of methodology and findings.

On the effect of COVID-19 and policy uncertainty on the stock market: evidence from India

“…The results reveal that exchange rate and oil prices have significant impact on stock market performance. Likewise, in the long run, the TMU has insignificant impact on stock price, which is again contrary to Ghosh et al . (2022).…”

“…The results reveal that exchange rate and oil prices have significant impact on stock market performance. Likewise, in the long run, the TMU has insignificant impact on stock price, Ghosh et al (2022). They find that volatility in the stock prices, among other macroeconomic fundamentals, is attributed to the EPU.…”

“…(2016). Ghosh et al . (2022) empirically analyze the impact of EPU on India’s macroeconomic fundamentals, for instance, import, export, interest rate, exchange rate, inflation and stock market in the pre-COVID-19 and during the COVID-19 era.…”

“…The impact of EPU on economic activity at the firm level is shown by Baker et al (2016). Ghosh et al (2022) empirically analyze the impact of EPU on India's macroeconomic fundamentals, for instance, import, export, interest rate, exchange rate, inflation and stock market in the pre-COVID-19 and during the COVID-19 era. To this end, the study utilizes dynamic conditional correlation-generalized autoregressive conditional heteroscedasticity (DCC-GARCH) and Markov regimeswitching model.…”

Investigation into the dynamic relationships between global economic uncertainty and price volatilities of commodities, raw materials, and energy

“…Bakas and Triantafyllou (2020) demonstrated the significant negative impact of the pandemic on commodity market volatility and highlighted the vulnerability of petroleum oil markets to uncertainty. Meanwhile, Ghosh et al (2022) using the DCC-GARCH model, revealed that EPU significantly impacted macroeconomic variables such as imports, exports and inflation rates following the outbreak of COVID-19. Similarly, Yin et al (2023), using the SV-TVP-FAVAR model, revealed that during the COVID-19 period, commodity prices exhibited a fluctuating increasing trend.…”