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The Optimal Economic Uncertainty Index: A Grid Search Application


  • Pei-Tha Gan



A noteworthy characteristic of empirical studies on the economic uncertainty index is that very few published papers depend on normative analysis. Therefore, normative analysis cannot be used to refute the precision of the economic uncertainty index; the lack of precision is simply the outcome of a misspecification of a commonly used model and a complex data collection process. To overcome this shortcoming, this paper uses the optimal form of the economic uncertainty index and determines its empirical validity based on a sample of 7 countries, including 3 developed and 4 developing countries. Using a grid search optimization procedure, the findings provide some policy implications; the optimal economic uncertainty index can characterize the uncertainty level of macroeconomic conditions and serve as a guiding policy tool for improving uncertainty levels in macroeconomic conditions. The estimated response function of the optimal economic uncertainty index suggests that the exchange rate, inflation, interest rate and output are useful indicators for central banks’ decision-making and that the optimal index supports the prediction of economic uncertainty. Copyright Springer Science+Business Media New York 2014

Suggested Citation

  • Pei-Tha Gan, 2014. "The Optimal Economic Uncertainty Index: A Grid Search Application," Computational Economics, Springer;Society for Computational Economics, vol. 43(2), pages 159-182, February.
  • Handle: RePEc:kap:compec:v:43:y:2014:i:2:p:159-182 DOI: 10.1007/s10614-013-9366-y

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    References listed on IDEAS

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    Cited by:

    1. Gan, Pei-Tha, 2014. "The precise form of financial integration: Empirical evidence for selected Asian countries," Economic Modelling, Elsevier, vol. 42(C), pages 208-219.

    More about this item


    Central bank; Exchange rate; Monetary policy; Optimal economic uncertainty; Grid search; C61; E58; E61; F41;

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics


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