Google Web Searches, Uncertainty and the U.S. Business Cycle

Abstract

Behavioural Sciences proved both in empirical and theoretical methods that we often take decisions associated with un-known risk, i.e. characterized by a probability distribution of the outcomes that is undetectable. In other words, we live in an uncertain world. Whether we face events which we didn’t even thought they could happen or whether we simply can’t process the possible scenarios, uncertainty represents a key factor in our decision-making. Discussions about the pervasiveness of uncertainty—whatever its source and persistence—and, thus, its effects on the financial and economic activity, quickly leads to the need for a quantitative measure of this force. In this study, we introduce novel uncertainty indicators based on the frequency of internet searches and then we investigate the effect of exogenous uncertainty shocks on the U.S. economic activity within a vector auto-regressions (VAR) approach.