We consider several economic uncertainty indicators for the US and UK before and during the COVID-19 pandemic: implied stock market volatility, newspaper-based policy uncertainty, Twitter chatter about economic uncertainty, subjective uncertainty about business growth, forecaster disagreement about future GDP growth, and a model-based measure of macro uncertainty. Ralph Sueppel is founder and director of SRSV, a project dedicated to socially responsible macro trading strategies. We use the audit results to…evaluate the performance of our computer-automated methods, and construct additional data. We extend our approach to other countries, finding elevated levels of economic policy uncertainty abroad, as well. This Policy Brief presents the key challenges raised by this phenomena: Moore, Angus (2016), “Measuring Economic Uncertainty and Its Effects”, Reserve Bank of Australia, Research Discussion Paper, 2016-01. The second variable considered is the economic policy uncertainty which is designed to measure policy-related economic uncertainty as proposed by Baker et al. First, we show a strong relationship between our measure of economic policy uncertainty and other measures of economic uncertainty, e.g., implied stock-market volatility. Uncertainty has become the mantra of this economic cycle. The index also shows an upward drift since the 1960s, perhaps due to rising political polarization or the growing economic role for government. We use these new measures to investigate the relationship of policy uncertainty to firm-level stock price volatility, investment rates, and employment growth and to aggregate investment, output, and employment. To push back to 1900, we rely on archives for six major US newspapers published throughout the last century….this long-span EPU index highlights pre- World War II political developments and shocks like the Gold Standard Act of 1900, the outbreak of World War I, the Versailles conference in 1919, and a sustained surge in policy uncertainty from late 1931 when President Hoover, and then President Roosevelt, introduced a rash of major new policies. We find that, since 2008, economic policy uncertainty in the United States has been at a level approximately two times its long run average. Kuhnen conducted the study with Elyas Fermand, a PhD candidate at UNC Kenan-Flagler; Itzhak Ben-David, professor of finance at The Ohio State University and NBER; and Geng Li, chief of the consumer finance section at the Federal Reserve Board. In their seminal paper, Baker, Bloom, and Davis (2016) (henceforth BBD) use contents in newspaper articles to construct Economic Policy Uncertainty indices (henceforth EPU indices) for major economies. 1. Introduction. They hypothesize that when employers are unsure of future regulations, they postpone hiring and investment decisions rather than risk having to reverse them in the future. “In this context, uncertainty refers to…lack of…clarity…about future economic activity…Uncertainty…is not directly observable. He has worked in economics and finance for over 25 years for investment banks, the European Central Bank and leading hedge funds. The results suggest that elevated policy uncertainty in the United States and Europ… How to measure economic uncertainty. Economic Policy Uncertainty. Second, we compare our index to other measures of policy uncertainty, e.g., speech “Inflation, Uncertainty, and Monetary Policy” given the 26 September 2017. s.Ş—o¤/Ža»oºý*¿E«ÏbäT$ÒSÙ¼¬´Î|QG¦j+íÞèŽÓë™å/–Y É^‰Œ‚læûä’oÑÕÿ. 2016. High levels of uncertainty can disrupt business and consumer spending plans. The main benefit of this measure of stock volatility is that it provides a very long time series…, A measure of forward-looking stock market volatility can be constructed from the implied volatility of call and put options…It represents the expected one-month-ahead volatility…Unfortunately, data for option-implied volatility are more limited.”, Economic uncertainty tends to increase faster than it decreases and periods of high or low uncertainty tend to persist…The dynamics of uncertainty are often characterized by, Economic uncertainty is estimated to be higher than average before federal elections and in the month of the election… The, Economic uncertainty index is…correlated with ‘monetary policy surprises’…I measure ‘monetary policy surprises’ by the absolute difference between the market-implied cash rate the day before a cash rate decision and the subsequent decision. In addition, the analysis includes a widely used proxy of forecast uncertainty, measured through the disagreement among professional forecasters , and a measure of economic policy uncertainty which is based on newspaper coverage . Recent academic papers illustrate how macroeconomic data support predictions of energy market flows and prices. “In this context, uncertainty refers to…lack of…clarity…about future economic activity…Uncertainty…is not directly observable. Five metrics of uncertainty in the United States and the United Kingdom set records in the first few months of 2020, according to a team of 15 international researchers including Chicago Booth’s Steven J. Davis.. Headings, links and cursive text have been added. The OECD described GDP as … Statistics that measure the levels of uncertainty in an economy corroborate these views. There is a high correlation between our human- and computer-generated indices (0.86 in quarterly data from 1985 to 2012 and 0.93 in annual data from 1900 to 2010). The measures are: 1.Diversification 2.Flexibility 3.Liquidity 4.Capital Rationing 5.Contract Farming 6.Choice of Reliable Enterprise 7.Adoption of Innovative Techniques 8.Discounting for Risk 9.Maintaining Reserves 10.Guaranteed Agricultural Prices 11. The index is: higher around recessions, elections, monetary policy surprises and some major events; tends to increase faster than it decreases; and is driven by both domestic and foreign factors. “Measures of dispersion between forecasters for economic variables can also proxy for economic uncertainty. “, “Commercial data providers that include Bloomberg, FRED, Haver and Reuters carry our indices to meet demands from banks, hedge funds, corporates and policy makers. And lastly, they check for economic foreca… While uncertainty is not directly observable, this article constructs an aggregate measure of the economic uncertainty faced by households and companies, based on a number of proxy indicators. To capture uncertainty reflected in media coverage, I follow Baker et al (2015) to construct a measure of newspaper articles that reference economic uncertainty. The following points highlight the top twelve measures to be adopted to deal with uncertainty in a farm enterprise. This Economic Letter examines uncertainty about the future course of short-term interest rates, that is, the expected path of Federal Reserve monetary policy. They also quantify temporary federal tax provisions that could change. “Measuring Economic Policy Uncertainty.” Quarterly Journal of Economics, November 2016, Vol. The IMF’s new World Uncertainty Index (WUI) captures uncertainty related to economic and political events in the near-term and long-term, and looks back 60 years. The Bank of England believe the most likely forecast is in the centre (thickest black line) However, the range of the fan shows different possible outcomes. As well as the DMP measure of Brexit-specific uncertainty (Chart 4.2), some indicators capturing general uncertainty have risen too. This post ties in with the subject of “the importance of tracking macroeconomic change” in the summary on macro trends. Working under our close supervision, teams of University of Chicago students underwent a training process and then carefully read overlapping sets of articles. One group of economists created an Uncertainty Index based on words that relate to uncertainty and the economy in ten prominent newspapers. The below are excerpts from the papers. Baker, Scott R. , Nicholas Bloom, and Steven J. Davis (2015), “Measuring Economic Policy Uncertainty”, NBER Working Paper No. Baker, Scott R.; Bloom, Nicholas; and Davis, Steven J. For example, an above-average proportion of respondents to the Deloitte CFO Survey — more than half — have reported high uncertainty in … Using similar methods, we construct…indices for eleven other countries, including all G10 economies.”, “First, we show a strong relationship between our measure of economic policy uncertainty and other measures of economic uncertainty, e.g., implied stock market volatility.”, “We conducted an extensive audit study of 12,000 randomly selected articles drawn from major US newspapers. "Measuring Economic Policy Uncertainty." In response, economists have developed a large and active literature that attempts to measure uncertainty…Commonly used proxies of uncertainty…include: newspaper-based measures of uncertainty…finance-based measures…and measures of disagreement among forecasters for key economic variables.”, “To capture uncertainty reflected in media coverage, I…construct a measure of newspaper articles that reference economic uncertainty…I search a database of newspaper articles (Factiva) for economic uncertainty-related articles. Tracking economic uncertainty consistently is “expensive” and hence markets are probably “rationally inattentive”, as explained in a previous post, suggesting that there is an opportunity of genuine value generation. Heightened economic uncertainty widens the potential distribution of outcomes; this should show up as greater dispersion among forecasters…Forecast dispersion measures are closely conceptually connected to economic activity. This mechanism is referred to as the option value of waiting. 1178 THE AMERICAN ECONOMIC REVIEW MARCH 2015 A challenge in empirically examining the behavior of uncertainty, and its rela-tion to macroeconomic activity, is that no objective measure of uncertainty exists. A forecast chart shows the range of possible forecasts for economic growth. The idea behind the measure is that information about economic uncertainty could be contained in newspaper coverage, not that media coverage causes economic uncertainty. Measuring uncertainty of economic policy. However, it has a much shorter history than most other measures…The measure is calculated as the cross-sectional coefficient of variation of analysts’ forecasts.”. In response, economists have developed a large and active literature that attempts to measure uncertainty…Commonly used proxies of uncertainty…include: newspaper-based measures of uncertainty…finance-based measures…and measures of disagreement among forecas… Since the 1990s, political polarization has increased in the United States. 131, Issue 4, pp. Moore, Angus (2016), “Measuring Economic Uncertainty and Its Effects”, Reserve Bank of Australia, Research Discussion Paper, 2016-01. In other words, economic growth needs to somehow measure the relationship between total resource inputs and total economic outputs. The index is constructed by text-mining country reports from the Economist Intelligence Unit. Our findings are broadly consistent with theories that highlight negative economic effects of uncertainty shocks. Traditional measures based on electoral data or volatility of policy variables (taxes, interest rates, foreign exchange) I. For example, the Economic Uncertainty Index (EPU), which tracks policy-related uncertainty, peaked at an all-time high at the beginning of this year, at a level which was significantly higher compared to … less spending and investment) Economic uncertainty usually causes a lower rate of economic growth, until the uncertainty is resolved. Our index reflects the frequency of articles in 10 leading US newspapers that contain the following triple: ‘economic’ or ‘economy”; “uncertain’ or ‘uncertainty’; and one or more of ‘congress’, ‘deficit’, ‘Federal Reserve’, ‘legislation’, ‘regulation’ or ‘White House’. Guide to Systematic Macro Trading Strategies, Reasons and Evidence for Macro Inefficiency, Quantitative Methods to Increase Macro Efficiency, U.S. natural interest rate stuck at 0%: evidence and consequences, Inefficient benchmarking and trading opportunities, Forecasting energy markets with macro data, Predicting volatility with heterogeneous autoregressive models, Macro trading and macroeconomic trend indicators, Estimating the positioning of trend followers, How to build a quantamental system for investment management, Realised volatility measured here by the monthly average of the daily absolute percentage change… is one measure of stock volatility. Thus, they have used several methods to measure the approximate levels of uncertainty in the economy. For their uncertainty measure, they used the Index of Economic Policy Uncertainty (EPU) developed by Scott Baker, Nicholas Bloom and Steven Davis. Such an index is interesting for China for a few reasons. It is also quite timely, although less so than stock volatility measures. Economic uncertainty rose to historically high levels during the financial crisis and remained elevated until late 2013. Importantly, uncertainty varies over time, rising to high levels during turbulent periods such as the recent financial crisis. At present, he is head of research and quantitative strategies at Macrosynergy Partners. Fundamental trend following uses moving averages of past fundamental data, such as valuation metrics or economic indicators, to predict future fundamentals, analogously to the... © © 2015 SRSV Ltd. | All rights reserved. We develop new measures of economic policy uncertainty for the United States and 11 other major economies. The Wall Street Journal talks of economic policy uncertainty, but its claims hold only for “news uncertainty”; and the article does not even mention the broader and more complete measure. Economic uncertainty refers to how firms and consumers are unsure about the future direction of the economy and usually react in a more conservative behaviour (i.e. Moreover, these measures are timely – for instance, the Consensus Economics survey is typically conducted in the early part of the month and the responses are published shortly thereafter. and its numerous text-based developments (time-varying and cross-country) Most quotes are from the RBA paper; the NBER paper quotes are marked specifically. Economic uncertainty in the UK can be illustrated by using these Bank of England forecast charts for economic growth. 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