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The Optimal Economic Uncertainty Index: A Grid Search Application

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  • Pei-Tha Gan

Abstract

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

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  • 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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    3. Havvanur Feyza Erdem & George Tawadros, 2020. "Estimating An Optimal Macroeconomic Uncertainty Index For Australia," Working Papers 2020-02, DePauw University, School of Business and Leadership and Department of Economics and Management.
    4. Han, Junhee & Lee, Keun, 2022. "Heterogeneous technology and specialization for economic growth beyond the middle-income stage," Economic Modelling, Elsevier, vol. 112(C).

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    More about this item

    Keywords

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

    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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