Key findings
This new data set allows us, for the first time, to examine the historical
evolution of uncertainty around the globe. Several interesting stylized
facts emerge:
First, global uncertainty has increased significantly since 2012.
The latest data for the fourth quarter of 2019 show that, after dipping in
the third quarter of 2019, the aggregate index—a GDP-weighted average of
143 countries—is at an all-time high.
The recent levels of global uncertainty are also exceptional in a
historical context. Looking back at the past 60 years, we see few episodes
in which uncertainty has been at levels close to those observed in the past
decade. Other notable historical episodes 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.
These global episodes, however, do not mean that levels of uncertainty are
historically high for all countries in the world. They reflect, to a large
extent, the increasing role of global factors in driving uncertainty across
the globe. For example, the current level of uncertainty in China is
significantly lower than the level recorded during the cultural revolution
in the late 1960s, a period when China was less connected to the rest of
the world.
Second, uncertainty spikes are more synchronized in advanced economies
than in emerging market and low-income economies.
Our analysis finds that uncertainty in emerging market and low-income
economies mostly follows the global average. This is because individual
country shocks are not synchronized, so they get averaged away. In
contrast, uncertainty in advanced economies spikes sharply, because these
countries tend to move together. Within advanced economies, uncertainty
synchronization is higher among euro area countries. In addition, we find
that stronger trade and financial linkages across countries lead to
stronger uncertainty synchronization.
Third, the average level of uncertainty is higher in low-income
economies than in emerging market and advanced economies.
One potential reason for this is that developing countries appear to have
more domestic political shocks like coups, revolutions, and wars; are more
susceptible to natural disasters like epidemics and floods; and their
economies are more volatile as they are more frequently hit by external
shocks and have more limited capacity to manage these shocks.
Fourth, there is an inverted U-shaped relationship between uncertainty
and democracy.
As countries move from a regime of autocracy and anocracy toward democracy,
uncertainty increases. As countries move from some degree of democracy to
full democracy, uncertainty declines.
Finally, increases in the index foreshadow significant output declines,
with the effect being larger in countries with weaker institutions.
