The Unassuming Economist

From a paper by Karan Bhasin, Kajal Lahiri and Prakash Loungani:

“This paper estimates uncertainty shocks using density forecasts from the Reserve Bank of India’s Survey of Professional Forecasters (2008–2023). These forecasts enable a direct measurement of unobservable uncertainty in real-time, as the first difference in the second moment of the densities. In addition, we propose a forecast calibration test based on the predictive sequential principle. We report five key findings: (i) macroeconomic uncertainty in India has been on a decline since 2008; (ii) shocks to uncertainty derived from density forecasts compare favorably with other popular measures, viz. Economic Policy Uncertainty and VIX; (iii) prequential tests indicate forecasts to be calibrated; (iv) uncertainty is affected primarily by negative news and is variance rational, and (v) it captures demand shocks even after controlling for global uncertainty shocks, in contrast to EPU and VIX, which are primarily driven by supply shocks. Distinguishing these shocks is crucial for optimal monetary policy.”