Nexus among Indian business cycle–financial cycle and Policy Uncertainty Index

Economic and policymakers have noted that policy uncertainty plays a vital role in business and financial activities. Previous research evidences that a rise in uncertainty results in high unemployment and adversely affects economic growth. The objective of this study is to analyze the impact of policy uncertainty in the business cycle and financial cycle. Therefore, the hypothesis of this paper is to test, whether there is causal nexus among business cycle, financial cycle, and policy uncertainty in India. In particular, we analyzed the time-varying nexus among India's policy uncertainty, business cycle, and financial cycle from 2002 Q4 to 2020 Q1 using Time-Varying Parameter Vector Autoregression method. According to our findings, shocks to policy uncertainty are negatively related to the business cycle, whereas the impact of policy uncertainty on the financial cycle varies significantly over time. Our findings bear practical policy implications that policymakers should reduce the uncertainty related to the financial market on its own level to foster a healthy investment climate.