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Tracking Uncertainty through the Relative Sentiment Shift Series

Author

Listed:
  • Seohyun Lee

    (Economic Research Institute, Bank of Korea)

  • Rickard Nyman

    (University College London, Centre for the Study of Decision-Making Uncertainty)

Abstract

We examine the causal dynamic relationship between economic policy uncertainty and economic activities, using a Local Projection model with external instruments. Based on the psychological theory of conviction narratives, we construct a Relative Sentiment Shift (RSS) index and use it as an instrumental variable that captures exogenous variations in economic policy uncertainty. Our empirical results suggest that an increase in economic policy uncertainty induces recessionary pressures in the economy: reductions in production and employment, a sharp stock market downturn, and a constrained financial market.

Suggested Citation

  • Seohyun Lee & Rickard Nyman, 2019. "Tracking Uncertainty through the Relative Sentiment Shift Series," Working Papers 2019-12, Economic Research Institute, Bank of Korea.
    • Handle: RePEc:bok:wpaper:1912
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    File URL: http://papers.bok.or.kr/RePEc_attach/wpaper/english/wp-2019-12.pdf
    File Function: Working Paper, 2019
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    More about this item

    Keywords

    Economic narratives; Algorithmic text analysis; Uncertainty; Dynamic causal effect; Local projection; IV Regression;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General

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