60 Years of Uncertainty
Source details
- Canonical URL
- 60 Years of Uncertainty
Other formats
Bibliographic details
- Authors: HITES AHIR, NICHOLAS BLOOM, DAVIDE FURCERI
- Published: March 1, 2020
New measure of uncertainty: World Uncertainty Index (WUI)
- The WUI is a quarterly measure that captures uncertainty related to economic and political events in the near-term and long-term, and looks back 60 years.
- Coverage: 143 countries — "all countries in the world with a population of at least 2 million."
- Time span: goes back to the mid-1950s, providing data for the past 60 years.
- Aggregate measure: the aggregate index is a GDP-weighted average of 143 countries.
Construction methodology
- Source texts: country reports from the Economist Intelligence Unit (EIU), compiled on a quarterly basis.
- Three-step construction:
1. Compile country-specific EIU reports on a quarterly basis from the mid-1950s onward for 143 countries. 2. Count the number of times the word "uncertainty" (and its variants) is mentioned in these reports. 3. Normalize the total count of the word "uncertainty" according to the total number of words in each report.
- The index uses a single source for all countries to allow cross-country comparability.
- It captures uncertainty related to both near-term events (example: United Kingdom’s referendum vote in favor of Brexit) and long-term concerns (examples: impending withdrawal of international forces in Afghanistan; tensions between the Democratic People’s Republic of Korea and the Republic of Korea).
Validation and associations
- Evaluation steps:
- Examine narratives associated with the largest global spikes.
- Show associations between the WUI and other measures: greater economic policy uncertainty, stock market volatility, risk, and lower GDP growth.
- Document that the index tends to rise close to political elections.
- Empirical association: spikes in the index foreshadow significant output declines, with the effect being larger in countries with weaker institutions.
Key findings and stylized facts
- Global increase since 2012:
- "Global uncertainty has increased significantly since 2012."
- Latest data for the fourth quarter of 2019 show that, after dipping in the third quarter of 2019, the aggregate index is at an all-time high.
- Historical context:
- The recent levels of global uncertainty are "exceptional in a historical context" over the past 60 years.
- Notable historical episodes with high uncertainty include: the assassination of US President John F. Kennedy, the Vietnam War, the gold crisis in the late 1960s, and the oil crises in the 1970s.
- Country-specific note: current uncertainty in China is significantly lower than the level recorded during the cultural revolution in the late 1960s.
- Synchronization patterns:
- "Uncertainty spikes are more synchronized in advanced economies than in emerging market and low-income economies."
- Uncertainty in emerging market and low-income economies mostly follows the global average because individual country shocks are not synchronized and get averaged away.
- Advanced economies tend to move together, producing sharp synchronized spikes; synchronization is higher among euro area countries.
- Stronger trade and financial linkages across countries lead to stronger uncertainty synchronization.
- Cross-country level differences:
- "The average level of uncertainty is higher in low-income economies than in emerging market and advanced economies."
- Possible drivers: more domestic political shocks (coups, revolutions, wars), greater susceptibility to natural disasters (epidemics, floods), more frequent external shocks, and more limited capacity to manage shocks.
- Political regime relationship:
- "There is an inverted U-shaped relationship between uncertainty and democracy."
- As countries move from autocracy and anocracy toward democracy, uncertainty increases; as they move from some degree of democracy to full democracy, uncertainty declines.
Research uses and policy relevance
- The dataset can serve as an alternative measure of economic activity where standard indicators (such as quarterly GDP for many countries) are not available, because spikes foreshadow output declines.
- Potential research questions and applications:
- Impact of differences in the level of uncertainty across countries on macroeconomic outcomes, such as foreign direct investment.
- Investigation of the various drivers of uncertainty.
- Examination of the economic effects of policies in times of uncertainty.
Authors
- HITES AHIR — senior research officer, IMF’s Research Department.
- NICHOLAS BLOOM — William D. Eberle Professor of Economics, Stanford University.
- DAVIDE FURCERI — division chief, IMF’s Fiscal Affairs Department.
Source: F&D Magazine — "60 Years of Uncertainty", HITES AHIR, NICHOLAS BLOOM, DAVIDE FURCERI, March 2020.
Content in this bundle
- 60 عاما من عدم اليقين
- Nuestro nuevo índice ofrece una forma innovadora de entender un concepto vago
- Notre nouvel indice apporte des éclairages inédits sur un concept flou
- The IMF’s World Uncertainty Index
- 不确定性：60 年的历史演变 - 金融与发展 - 国际货币基金组织季刊 -2020年3月号·第57卷·第1期