Economic Policy Uncertainty Versus Sector Volatility: Evidence from India Using Multi-scale Wavelet Granger Causality Analysis

Abstract

The present study examines the relationship between Indian economic policy uncertainty (IEPU) and the different sector volatilities (SVs) of the Indian economy over the period 2006–2021. The relationship is studied using a multi-scale correlation framework, combining wavelet coherence analysis with the Granger causality test. The findings indicate a stronger relationship between the IEPU and SV for all sectors during COVID-19, primarily in the medium term. While IEPU led to SV during the global financial crisis (GFC), the SVs led to the IEPU during the COVID-19. However, the Granger causality test provides evidence that, in the long term, the SVs cause the IEPU while the IEPU leads to SV in the short term. The IT sector is crucial as its volatility leads to IEPU across all scales. These results have substantial implications for policymakers and portfolio managers. JEL Codes: G10, G17, G32