Estimating the Impact of Uncertainty Shocks on GDP Growth Using Cross-Country Panel Data, and Identification of Noise Shocks From Text-Based Infectious Disease Index



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The first part of this dissertation focuses on the identification of uncertainty shock on GDP growth. I exploit a cross-country panel data on stock market returns and volatility to estimate their impact on GDP growth rates. In a two stage regression analysis with four exogenous shocks- natural disasters, political revolutions, political coups and terrorist attacks are employed to estimate their impact on stock returns and volatility, in the first step. These disasters tend to produce fluctuations in stock returns and volatility to generate first and second moment shocks. The uncertainty shock is found to play a major role that impact the GDP growth of the countries in our study significantly. Further, endogeneity is addressed in such a way that, the estimated lagged values of stock returns and volatility from the first stage are used as explanatory variables to identify their impact on future (one year after) GDP growth, in the second step. More specifically, this work sheds light on the sensitivity of each country’s growth to variations in stock returns levels and stock returns volatility. The country-wise estimates from this study are found to be heterogeneous. Indonesia and Italy observed the highest decline in growth rates with magnitudes 1.79% and 1.04%, respectively, in response to unit standard deviation increase in uncertainty.\ The second part of this work focuses on estimating the impact of noise shock on various macro variables. Noise shocks can cause a shift in people's outlook or expectations about the future of the economy. The shift in their outlook can result in a change in their consumption patterns, which can impact the business cycle conditions. Using survey data, we measure people's expectations about the economy by comparing Real GDP forecasts between different quarters. We find that an 1% decline in people's expectations resulting from a noise shock causes a decline in Real GDP growth by 5% and 0.8% decline in employment rate. However, this shift in expectations is transitory, and once they realize it is a false alarm, the business cycle returns to its steady state. Furthermore, the impact of the noise shock on the business conditions are found to resemble with that of a negative demand shock.



Disaster shocks, Uncertainty shocks, Noise Shocks, Infectious Disease Index, Sentiment Shocks