“If I had to identify a theme at the outset of the new decade it would be increasing uncertainty.” Kristalina Georgieva, Managing Director of the IMF, Peterson Institute for International Economics, January 17, 2020
It is well-known that uncertainty reduces the willingness of firms to hire and invest and of consumers to spend. Yet it is a nebulous concept, because it reflects uncertainty in the minds of consumers, managers, and policymakers about future events (that may or may not happen). It is also a broad concept since it relates to macro phenomena like GDP growth and micro phenomena like the growth rate of firms—as well as other events like elections, wars, and climate change.
Looking back at the past 60 years, we see few episodes where uncertainty has been at levels close to those observed in the past decade.
Given all these challenges, it is not surprising that researchers have relied on different methods to measure uncertainty. One approach is based on the volatility of key economic and financial variables (Leahy and Whited 1996; Bloom 2009; Ludvigson, Ma, and Ng, forthcoming). Another method is based on text-searching newspaper archives, for example, the Baker, Bloom and Davis (2016) Economic and Policy Uncertainty index. However, these approaches share an important limitation: they are typically limited to a set of mostly advanced economies, and for many of these countries the data are available only after the early 1990s.
Baker, S. R., N. Bloom, and S. J. Davis. 2016. “Measuring Economic Policy Uncertainty.” Quarterly Journal of Economics 131 (4): 1593–1636.
Leahy, J., and T. Whited. 1996. “The Effect of Uncertainty on Investment: Some Stylized Facts.” Journal of Money, Credit and Banking28 (1): 64–83.
Ludvigson, S. C, S. Ma, and S. Ng Forthcoming. “Uncertainty and Business Cycles: Exogenous Impulse or Endogenous Response?” American Economic Journal: Macroeconomics, forthcoming.