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The information content of conflict, social unrest and policy uncertainty measures for macroeconomic forecasting

Author

Listed:
  • Marina Diakonova

    (Banco de España)

  • Luis Molina

    (Banco de España)

  • Hannes Mueller

    (IAE-CSIC and BSE)

  • Javier J. Pérez

    (Banco de España)

  • Cristopher Rauh

    (University of Cambridge)

Abstract
It is widely accepted that episodes of social unrest, conflict, political tensions and policy uncertainty affect the economy. Nevertheless, the real-time dimension of such relationships is less studied, and it remains unclear how to incorporate them in a forecasting framework. This can be partly explained by a certain divide between the economic and political science contributions in this area, as well as by the traditional lack of availability of high-frequency indicators measuring such phenomena. The latter constraint, though, is becoming less of a limiting factor through the production of text-based indicators. In this paper we assemble a dataset of such monthly measures of what we call “institutional instability”, for three representative emerging market economies: Brazil, Colombia and Mexico. We then forecast quarterly GDP by adding these new variables to a standard macro-forecasting model in a mixed-frequency MIDAS framework. Our results strongly suggest that capturing institutional instability based on a broad set of standard high-frequency indicators is useful when forecasting quarterly GDP. We also analyse the relative strengths and weaknesses of the approach.

Suggested Citation

  • Marina Diakonova & Luis Molina & Hannes Mueller & Javier J. Pérez & Cristopher Rauh, 2022. "The information content of conflict, social unrest and policy uncertainty measures for macroeconomic forecasting," Working Papers 2232, Banco de España.
    • Handle: RePEc:bde:wpaper:2232
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    More about this item

    Keywords

    forecasting; social unrest; social conflict; policy uncertainty; forecasting GDP; natural language processing; geopolitical risk;
    All these keywords.

    JEL classification:

    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • D74 - Microeconomics - - Analysis of Collective Decision-Making - - - Conflict; Conflict Resolution; Alliances; Revolutions
    • N16 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - Latin America; Caribbean

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