## MEASURES OF UNCERTAINTY DON’T QUITE MEASURE UP

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**Canonical URL:** [MEASURES OF UNCERTAINTY DON’T QUITE MEASURE UP](https://www.imf.org/-/media/files/publications/fandd/article/2025/09/bloom.pdf)

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### Overview
- Text-based measures of uncertainty reached exceptionally high levels in 2025.
- Financial-market-based measures show only moderate increases in uncertainty.
- Survey-based measures, which spiked during the pandemic, have largely flatlined through June 2025.
- The three measures historically tracked one another, but diverged in 2025; the authors judge the truth to lie between the extremes implied by text measures and business surveys.

### How uncertainty is measured
- Textual analysis
  - Economic Policy Uncertainty (EPU) Index (Baker, Bloom, and Davis 2016)
    - Analyzes articles in hundreds of newspapers for mentions of terms related to economics, policy, and uncertainty.
    - US EPU reached a record high in 2025.
  - World Uncertainty Index (WUI) (Ahir, Bloom, and Furceri 2022)
    - Based on frequency of the term “uncertain” in Economist Intelligence Unit country reports.
    - Covers 71 countries and shows a trajectory similar to the EPU, indicating elevated perceptions of uncertainty across countries.
  - Concerns: evolution of language, potential bias in sources, inaccuracies in word counts as measures of intensity.
- Financial-market-based measures
  - Chicago Board Options Exchange Volatility Index (VIX)
    - Measures one-month-ahead implied volatility of the S&P 500.
    - Significant historical spikes: 1997–1998, 2008, 2011, 2020.
    - In 2025, the VIX reached 32 in April—elevated but not as large a spike compared with previous jumps.
  - Intercontinental Exchange Bank of America MOVE Index
    - Gauges implied volatility on bond yields; shows a similar picture of increased but not extreme uncertainty.
- Survey-based measures
  - US Survey of Business Uncertainty (SBU)
    - Administered by the Atlanta Federal Reserve Bank.
    - Queries almost 1,000 US businesses each month about sales forecasts.
    - Surveys showed a roughly doubling in measured uncertainty between January and May 2020; through June 2025 there was no comparable surge.
    - SBU panel raised predictions for sales growth after the November 2024 election of Donald Trump, with forecasts declining in spring 2025 after the beginning of tariff wars.
  - UK Decision Maker Panel (DMP)
    - Polls about 2,500 businesses a month across the UK; shows a pattern similar to the US SBU (surge during the pandemic but no recent increase).
  - Note: SBU measures one-year-ahead sales growth uncertainty for US firms; DMP shows three-month average sales growth uncertainty for UK firms.

### Economic mechanisms and impacts
- Real-options effect
  - High uncertainty raises the option value of waiting, causing firms to delay irreversible investments (example: a supermarket delaying building a new store).
  - When decisions are easily reversible (e.g., hiring part-time workers, renting equipment), firms can adapt without large irreversible commitments.
- Consumption
  - Uncertainty can cause individuals to postpone purchases of durables (housing, cars, furniture) because the option value of waiting increases.
- Financial costs
  - Uncertainty can increase the cost of finance (Fernandez-Villaverde and others 2011) by raising risk premia and default probabilities.
- Empirical findings from the literature
  - Greater uncertainty has a strong impact on reducing investment.
  - Effects on employment and consumption are weaker than on investment.
  - Uncertainty and financial frictions can have a multiplicative effect, magnifying impacts when financial conditions are tight.

### Assessment, projection, and scenarios
- Divergence in indicators
  - Text measures surged to record highs in 2025.
  - Market measures increased moderately (e.g., VIX = 32 in April 2025).
  - Survey measures showed no broad increase through June 2025.
- Authors’ assessment
  - Uncertainty in 2025 has risen above long-term levels but has not reached the peaks seen during the global financial crisis or the pandemic.
  - The 2025 surge in uncertainty is likely to slow growth by reducing investment, hiring, and consumer spending on durable goods.
  - Timing: The impact of uncertainty typically takes 6 to 18 months to slow growth (Caldara and Iacoviello 2022).
  - Outlook: The rise in uncertainty is not judged to be large enough to induce a global recession; it is more likely to slow growth through 2025 and 2026.

### Key statistics and exact figures cited
- World Uncertainty Index: constructed using Economist Intelligence Unit country reports covering 71 countries.
- US Survey of Business Uncertainty: queries almost 1,000 US businesses each month.
- UK Decision Maker Panel: polls about 2,500 businesses a month across the UK.
- VIX: reached 32 in April 2025.
- Survey surge during the pandemic: roughly doubling between January and May 2020.
- Typical lag for uncertainty to slow growth: 6 to 18 months.

*Source: SEPTEMBER 2025 F&D feature by Hites Ahir, Nicholas Bloom, and Davide Furceri.*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2025/09/bloom.pdf_