Modelling the Dynamic Interaction between Economic Policy Uncertainty and Commodity Prices in India: The Dynamic Autoregressive Distributed Lag Approach

Abstract

This study examines the dynamic interaction between oil, natural gas, and prices with Indian economic policy uncertainty (EPU). The study finds that gold prices and industrial production are fundamental drivers of Indian economic policy uncertainty in both the short and long runs, using a dynamic autoregressive distributed lag (ARDL) model with monthly data ranging from January 2003 to July 2020. Gold prices are positively related to the Indian EPU, while industrial production is negatively related to it. Thus, investors in the Indian economy should use gold as a hedge for portfolio diversification and as a safe haven during an economic crisis. We also find a significant positive interconnection between gold prices and crude oil prices in both the short run and the long run, while the significant positive impact of natural gas prices on crude oil prices manifests only in the long run. The evidence also indicates that the EPUs of the US and Europe positively affect the Indian EPU, while the EPU of China does not have a significant effect. Higher crude oil prices are associated with higher gas prices, whereas higher gold prices are negatively associated with the natural gas price and vice versa. Furthermore, the evidence shows that the Indian EPU does not have a significant effect on the changes in the prices of goods.