THE WORLD UNCERTAINTY INDEX - ASSA San Diego-January 2020 Hites Ahir (IMF), Nick Bloom (Stanford University) and Davide Furceri (IMF)
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THE WORLD UNCERTAINTY INDEX Hites Ahir (IMF), Nick Bloom (Stanford University) and Davide Furceri (IMF) ASSA San Diego—January 2020
Outline Motivation and contribution Construction of the WUI Reliability checks Stylized facts New evidence on the effect of uncertainty Next steps 2
Motivation and contribution Why an other measure? Existing measures available mostly for advanced economies… ...and often not comparable across countries. What we do? We construct a new index of uncertainty—the World Uncertainty Index (WUI)—for 143 individual countries on a quarterly basis from 1952 onwards using standardized and cross- country consistent sources: the Economist Intelligence Unit (EIU) country reports. 3
Construction of the WUI-The EIU Reports 4
Construction of the WUI-The EIU Reports Focus The country report typically covers politics, economic policy, the domestic economy, foreign and trade payments events, and on their overall impact on the country risk. In short, these reports examine and discuss the main economic, financial, and political trends in a country. Process In the writing the report step, field experts prepare a draft and send it to country experts based at headquarters. In the editing step, country experts at headquarters integrate the draft with their own inputs, and make sure the structure of the report is consistent and standardized. They also check that the report is consistent with the EIU’s global and regional views. In the second check step, a senior staff at headquarters does a thorough check of the draft. In the sub-editing step, sub-editors do a check to make sure that the report is well drafted, consistent, accurate, and do fact checking. In the production step, the report is checked to make sure that the report is properly coded 5 and styled adequately.
Construction of the WUI We count the number of times uncertainty is mentioned in the EIU country reports. Specifically, for each country and quarter, we search through the EIU country reports for the words “uncertain”, “uncertainty”, and “uncertainties”. To make the WUI comparable across countries, we scale the raw counts by the total number of words in each report. (note: no systematic difference in the number of words across countries and over time). 6
Construction of the WUI Pros Comparability of the WUI across countries: The index is based on a single source that has specific topic coverage—economic and political developments. The reports follow a standardized process and structure which helps to mitigate concerns about the accuracy, ideological bias and consistency of the WUI. Cons We only have one EIU report per country per quarter, so a far smaller body of text than the EPU index, so the sampling noise is likely to be substantial higher. We are reliant on the accuracy of the EIU reports, which to our knowledge are extremely high quality, but it still raises potential concerns over reliance on one underlying source. 7
Reliable? WUI vs EPU 300 WUI (EPU countries only) 300 United Kingdom United States EPU Index (right axis) 1200 WUI 700 600 WUI 250 250 correlation: 0.705 250 EPU (right axis) EPU (right axis) 1000 600 500 correlation: 0.719 correlation: 0.533 200 200 200 500 800 400 400 150 150 150 600 300 300 100 100 100 400 200 200 50 50 50 200 100 100 0 0 0 0 0 0 1996q1 2003q2 2010q3 2017q4 1996q1 2003q2 2010q3 2017q4 1996q1 2003q2 2010q3 2017q4 Note: The World Uncertainty Index (WUI) is computed by counting the frequency of uncertain (or the variant) in EIU country reports. The WUI is then normalized by total number of words, rescaled by multiplying by 1,000. Here is also rescaled by the global average of 1996Q1 to 2010Q4 such that 1996Q1-2010Q4=100. A higher number means higher uncertainty and vice versa. For the other countries covered by the EPU the median correlation is about 0.4. EPU more global in nature, WUI more country-specific (Chile a remarkable example). 8
Reliable? Level of WUI vs. Level of volatility -3.0 -2.5 Stock market return volatility correlation: 0.430 correlation: 0.531 -3.5 -3.0 RUS Bond yield volatility TUR PHL RUS UKR BRA -4.0 CHN ROUPOL HUN -3.5 FININDPAK KOR ARG KOR GRC THAVEN VNM JPN MEX PHL MY S EGY DEU NLDSWE ISR PER CZE COLECU SGPNOR ESP FRA -4.5 MY IRLITA S ZAF -4.0 JPN USA PRT THA MEX CHE SAU AUT CAN NER BEL DNKGBR AUS SGP HUN KWT KEN ISR COL NZL USA CHE ZAF -5.0 CHLIRN MAR -4.5 AUS PAK POL DEU CAN GBR SWE FIN NLDIRL FRA ESP CZE EGY BEL NZL AUT NOR DNK ITA TUN -5.5 -5.0 0.0 0.1 0.2 0.3 0.4 0.0 0.1 0.2 0.3 0.4 WUI WUI Note: The World Uncertainty Index (WUI) is computed by counting the frequency of uncertain (or the variant) in EIU country reports. The WUI is then normalized by total number of words and rescaled by multiplying by 1,000. The WUI is then normalized by total number of words, rescaled by multiplying by 1,000. A higher number means higher uncertainty and vice versa. 9
Reliable? Level of WUI vs. Level of risk 250 90 correlation: 0.325 correlation: 0.314 ECU 80 ECU 200 NGA NGA Political Risk (EIU) VNM PAK AZE VEN UKR 70 PAK KAZ LKA IDN AZE IDN IRN RUS IRN VEN UKR ARG All Risk (EIU) VNM RUS PHL LKA DZA TUR COL 60 DZA KAZ EGY ROU PER PHL ARG PER 150 CHN BGR THA CHN SAU EGY THA SAU BRA 50 TUR COL IND SVKHUN MY SPOLMEX ROU BRA MEX ISR ZAF CZE BGR IND MY S KOR 40 POLISR KOR 100 GRC SVK HKG HKG ZAFHUN CZE CHL NZL TWN AUS PRT ITA ESP 30 TWN JPN GRC ITA SGP BEL CHL IRL 20 AUS PRT BEL JPN ESP 50 NLD AUT DEU USA SGP CAN FRA GBR NZL FIN NOR CHEDNKSWE AUTNLD IRL DEUFRAUSA 10 FIN CHE CAN NOR SWE DNK GBR 0 0 0.0 0.1 0.2 0.3 0.4 0.0 0.1 0.2 0.3 0.4 WUI WUI Note: The World Uncertainty Index (WUI) is computed by counting the frequency of uncertain (or the variant) in EIU country reports. The WUI is then normalized by total number of words and rescaled by multiplying by 1,000. The WUI is then normalized by total number of words, rescaled by multiplying by 1,000. A higher number means higher uncertainty and vice versa. 10
Reliable? WUI vs. EPU & Volatility—panel framework Dependent Variable WUI (I) (II) (III) (IV) (V) (VI) (VII) (VIII) (IX) EPU 123.843*** 129.064*** 59.941*** (2.96) (4.60) (3.52) Stock Vol 0.353*** 0.131** 0.128** (3.30) (2.08) (2.19) Growth -0.025*** -0.017*** -0.007* (-4.41) (-3.58) (-1.90) Country FE No Yes Yes No Yes Yes No Yes Yes Year FE No No Yes No No Yes No No Yes N 1558 1558 1558 3766 3766 3766 4768 4768 4768 R2 (within R2) 0.10 0.10 0.42 0.02 0.00 0.38 0.01 0.01 0.29 Note: The World Uncertainty Index (WUI) is computed by counting the frequency of uncertain (or the variant) in EIU country reports. The WUI is then normalized by total number of words and rescaled by multiplying by 1,000. The WUI is then normalized by total number of words, rescaled by multiplying by 1,000. A higher number means higher uncertainty and vice versa. *,**,*** denote statically significance at 10, 5, and 1 percent respectively. T-statics in columns (I), (IV) and (VII) based on clustered standard errors. T-statics in the remaining columns based on Driscoll-Kraay standard errors. R2 reported for columns (I), (IV) and (VII); otherwise within R2 reported. 11
Reliable? WUI & Elections t-2 t-1 t t+1 t+2 All elections -0.002 0.022*** 0.044*** 0.047*** 0.023** (-0.29) (2.63) (4.64) (4.78) (2.90) Exogenous -0.003 0.036** 0.074*** 0.053*** 0.015 (-0.19) (2.44) (4.21) (3.54) (1.17) Note: The World Uncertainty Index (WUI) is computed by counting the frequency of uncertain (or the variant) in EIU country reports. The WUI is then normalized by total number of words and rescaled by multiplying by 1,000. The WUI is then normalized by total number of words, rescaled by multiplying by 1,000. A higher number means higher uncertainty and vice versa. t denotes time (quarter) of election. Dates for elections from Alesina et al. (2019). Sample: 377 election in 72 “democratic” countries, among which 166 are exogenous. *,**,*** denote statically significance at 10, 5, and 1 percent respectively. T-statics in columns (I), (IV) and (VII) based on clustered standard errors. T-statics in the remaining columns based on Driscoll-Kraay standard errors. 12
Stylized fact 1-Global uncertainty at historical high Global WUI-GDP weighted average US fis cal cliff and s overeign uncertainty 300 debt cris is in Europe concerning Brexit Iraq war Pos s ible and and U.S. trade US outbreak policy m ilitary of SARS s overeign 250 action in debt crisis US Iraq in Europe Brexit reces s ion ongoing and 9/11 turm oil in global financial s overeign 200 m arkets credit ris k global in Europe econom ic s lowdown financial credit 150 crunch 100 US political uncertainty 50 FED pres idential in Europe related to tightening elections , and the threat of Catalan World Uncertainty Index and political afterm ath of s eces sion from ris k in Greece Brexit Spain 1996Q1-2010Q4 average and Ukraine 0 1996q1 2001q4 2007q3 2013q2 2019q1 Note: The World Uncertainty Index (WUI) is computed by counting the frequency of uncertain (or the variant) in EIU country reports. The WUI is then normalized by total number of words and multiplying by 1,000. The WUI is then normalized by rescaling it using the average of 1996Q1 to 2010Q4 such that 1996Q1-2010Q4=100. A higher number means higher uncertainty and vice versa. 13
Stylized fact 2-Uncertainty higher in developing economies WUI by income groups 0.18 Third 0.16 quartile Interquartile range 0.14 0.12 Mean 0.10 0.08 First quartile 0.06 0.04 Low-income economies Emerging economies Advanced economies Note: The World Uncertainty Index (WUI) is computed by counting the frequency of uncertain (or the variant) in EIU country reports. The WUI is then normalized by total number of words and rescaled by multiplying by 1,000. A higher number means higher uncertainty and vice versa. 14
Stylized fact 3- inverted U-shape between uncertainty and democracy WUI and democracy 0.35 0.40 0.30 ZMB 0.35 NGA ZAF LBN ARG KEN ECUTUR COL 0.30 GBR 0.25 GNB NIC WUI WUI HTI VEN KOR GIN IDN LSO BRA NPLRUS MWI PER CIV 0.25 UKR BOL 0.20 UZB THA ZWE CAFCOD CZE HUN ETH TUN MDG FRA POL KHM BFA KGZ 0.20 GHA MEX GTM BGR ITA LBY TGO ISR PRY MDA DNK ESP NOR SWE CHE 0.15 OMN TCD SDN UGATZA BDI BEN SLV USA IRL PRT URY TKM EGY SLE PHL BWA PAN JPN DEU ARE MYSSEN 0.15 NAM SVN MNG KWT KAZ MMR CMR NER BGDLKA ROU TWN CAN NLD GRC NZL AUT CRI RWA PAK LBR HRV HND LVA JAM AUS 0.10 SAU VNM JOR IRN DZA MOZ ALB SVK AZE AGO SGP 0.10 MLI IND LTU COG TJK YEM CHNMAR GAB DOM BLR ERI PNG BEL CHL FIN 0.05 QAT MRT ARM 0.05 LAO GMB 0.00 0.00 -10.0 -5.0 0.0 5.0 6.0 7.0 8.0 9.0 10.0 Democracy Index Democracy Index Note: The World Uncertainty Index (WUI) is computed by counting the frequency of uncertain (or the variant) in EIU country reports. The WUI is then normalized by total number of words and rescaled by multiplying by 1,000. A higher number means higher uncertainty and vice versa. 15
Stylized fact 4-Uncertainty spikes more synchronized in advanced economies Synchronization Correlation Variance Explained by 1st Factor—PCA All countries -0.167 0.071 0.150 Advanced economies -0.146 0.121 0.221 Emerging and low-income -0.185 0.011 0.144 economies European -0.134 0.224 0.283 Note: synchronization between country i and j at time t defined as: , , = − , − , , where U denotes the WUI. 16
Stylized fact 4-with higher trade and financial linkages (I)a (II)a (III) (IV) (V) (IV) Trade linkages 0.113** 0.741** 0.738** 0.746** (2.37) (2.47) (2.49) (2.52) Financial linkages 0.131** 0.314** 0.313** 0.317** (2.32) (1.95) (2.01) (2.06) Output synchronization 0.011*** (3.10) Country-pair FE No No Yes Yes Yes Yes Time FE Yes Yes Yes Yes Yes Yes N 15,393 15,393 15,393 15,393 15,393 15,393 Note: synchronization between country i and j at time t defined as: , , = − , − , , where U denotes the WUI. Estimates are based on the following equation: , , = , + + 1 , , + 1 , , + , , + , , where , denotes trade linkages—defined as bilateral trade between country i and j, normalized by the sum of total trade of country i and j; , denotes financial linkages—defined as bilateral assets and liabilities between country i and j, normalized by the sum of total assets and liabilities of country i and j. , denotes output synchronization—defined as minus the absolute value GDP growth difference between country i and j, normalized by the sum of GDP growth of country i and j. **,*** denote significance at 5 and 1 percent, respectively. Country-pair and time fixed effects included but not reported. a dummy for common language and past or present colonial relationship included. 17
Approaches Effect of uncertainty shocks on output quarterly data (smaller sample) VAR approach IV-SVAR using exogenous elections as instruments Heterogeneity across countries larger effects in countries with weaker institutions annual data (entire sample) looking both at output and investment local projection role of institutions Heterogeneity across sectorslarger effects in sectors that are more financially constrained annual data for 22 industries looking both at output and investment 18 role of financial constraints
Ongoing work and next steps Extend time coverage back to 1952 Trade uncertainty (new measure and analysis) Other categories (monetary, fiscal, political, external vs. domestic..) 19
Additional Slides 20
Effect of uncertainty on economic activity-quarterly GDP response to WUI innovations 0 -.005 -.01 -.015 -.02 0 5 10 15 quarters 90% CI Cumulative Orthogonalized IRF Note: VAR fit to quarterly data for a panel of 46 countries from 1996q1 to 2018q2. Impulse responses of GDP to a one-standard deviation increase in the WUI—equal to the change in average value in the index from 2014 to 2016—based on a Cholesky decomposition with the following order: the log of average stock return, the WUI and GDP growth. The specification includes four lags of all variables. Country and time fixed effects are included. 21
Effect of uncertainty on economic activity-quarterly GDP response to WUI innovations—robustness checks 0 -0.005 -0.01 -0.015 -0.02 0 5 10 15 Baseline 8 lags WUI last Controlling for stock market volatility Before GFC Note: VAR fit to quarterly data for a panel of 46 countries from 1996q1 to 2018q2. Impulse responses of GDP to a one-standard deviation increase in the WUI—equal to the change in average value in the index from 2014 to 2016—based on a Cholesky decomposition with the following order: the log of average stock return, the WUI and GDP growth. The specification includes four lags of all variables. Country and time fixed effects are included. 22
Effect of uncertainty on economic activity-quarterly GDP response to WUI innovations—IV exogenous elections 0.005 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 -0.005 -0.01 -0.015 -0.02 -0.025 Note: VAR fit to quarterly data for a panel of 42 countries from 1996q1 to 2018q2. Impulse responses of GDP to a one-standard deviation increase in WUI—equal to the change in average value in the index from 2014 to 2016—using as instrument exogenous elections and based on a Cholesky decomposition with the following order: exogenous elections, the log of average stock return, the WUI and GDP growth. The specification includes four lags of all variables. Country and time fixed effects are included. SVAR-IV approach of Plagborg-Moller and Wolf (2019). First stage: , = 0.183 + 0.098 (6.47) t-statistics in parenthesis. 23
Effect of uncertainty on economic activity-annual GDP response to WUI innovations Investment response to WUI innovations 0.002 0.01 0 0 -0.01 -0.002 -0.02 -0.004 -0.03 -0.006 -0.04 -0.008 -0.05 -0.01 -0.06 -0.012 -0.07 0 1 2 3 4 0 1 2 3 4 Note: Response estimated using the local projection method (Jorda 2005) : , + − , −1 = + + , + , + , where y is the log of output (investment); are country-fixed effects; are time-fixed effects; X is a set of controls including lags of the growth rate of output and of the WUI index. Estimates based on annual data for a panel of 143 countries from 1996 to 2017. Solid line denoted the impulse responses of GDP to a one-standard deviation increase in the WUI—equal to the change in average value in the index from 2014 to 2016. Dotted lines denote 90 percent confidence bands. 24
Effect of uncertainty on investment-role of institutions Below-median rule of law Above-median rule of law 0.02 0.02 0 0 -0.02 -0.02 -0.04 -0.04 -0.06 -0.06 -0.08 -0.08 -0.1 -0.1 -0.12 -0.12 0 1 2 3 4 0 1 2 3 4 Note: Response estimated using the local projection method (Jorda 2005) : , + − , −1 = + + , + ℎ (1 − ) , + , + , where y is the log of output (investment); are country-fixed effects; are time-fixed effects; X is a set of controls including lags of the growth rate of output and of the WUI index. Estimates based on annual data for a panel of 143 countries from 1996 to 2017. Solid line denoted the impulse responses of GDP to a one-standard deviation increase in the WUI—equal to the change in average value in the index from 2014 to 2016. Dotted lines denote 90 percent confidence bands. Rue of law based on WDI. Results robust for different measures of institutional quality, to different thresholds, controlling for the level of development, unsegmenting rule of law with European settle mortality rates. 25
Effect of uncertainty on investment-role of institutions Below-median rule of law Above-median rule of law 0.02 0.02 0 0 -0.02 -0.02 -0.04 -0.04 -0.06 -0.06 -0.08 -0.08 -0.1 -0.1 -0.12 -0.12 0 1 2 3 4 0 1 2 3 4 Note: Response estimated using the local projection method (Jorda 2005) : , + − , −1 = + + , + ℎ (1 − ) , + , + , where y is the log of output (investment); are country-fixed effects; are time-fixed effects; X is a set of controls including lags of the growth rate of output and of the WUI index. Estimates based on annual data for a panel of 143 countries from 1996 to 2017. Solid line denoted the impulse responses of GDP to a one-standard deviation increase in the WUI—equal to the change in average value in the index from 2014 to 2016. Dotted lines denote 90 percent confidence bands. Rue of law based on WDI. Results robust for different measures of institutional quality, to different thresholds, controlling for the level of development, unsegmenting rule of law with European settle mortality rates. 26
Effect of uncertainty on economic activity- sectoral data and role of financial constraints Differential output response Differential productivity response 1 1 0.5 0.5 0 -1 0 1 2 3 0 -0.5 -1 0 1 2 3 -1 -0.5 -1.5 -1 -2 -1.5 -2.5 -2 -3 -3.5 -2.5 -4 -3 Note: Response estimated using the following specification: ∆ = + + + ∑3 =0 , − + where y is the log of sectoral output; are sector-country fixed effects; are country-time fixed effects; are sector-time fixed effects; EFD is the Rajan and Zingales’s (1998) measure of the degree of dependence on external finance in each industry—measured as the median across all U.S. firms, in each industry, of the ratio of total capital expenditures minus the current cash flow to total capital expenditures. Estimates based on annual data for a panel of 22 industries, 56 countries from 1995 to 2017 (the size of the estimation sample is 25,618 observations). Solid line denotes the differential output effect to a one-standard deviation increase in the WUI—equal to the change in average value in the index from 2014 to 2016—of an industry with high external financial dependence (at the 75th percentile distribution of the indicator) compared to an industry with low external financial dependence (at the 25th percentile distribution of the indicator). Dotted lines denote 90 percent confidence bands. 27
0.00 0.02 0.04 0.06 0.08 0.10 0.12 0.14 0.16 0.18 0.20 Q1-1952 Q4-1953 Q3-1955 of 1960 Q2-1957 recession Q1-1959 Q4-1960 Q3-1962 Q2-1964 Vietnam War Q1-1966 Q4-1967 Q3-1969 Q2-1971 Q1-1973 Q4-1974 Q3-1976 policy Q2-1978 proposal President Q1-1980 Carter's tax Q4-1981 Q3-1983 Black Q2-1985 Monday Q1-1987 United States Q4-1988 Q3-1990 Q2-1992 Q1-1994 Time coverage Q4-1995 Credit crunch 9/11 Q3-1997 Gulf War II Q2-1999 Q1-2001 Q4-2002 Q3-2004 Q2-2006 Q1-2008 Fiscal clif f Trump President Q4-2009 election of political gridlock Q3-2011 Q2-2013 Q1-2015 w ar Q4-2016 Trade Q3-2018 28
Time coverage Argentina Brazil 0.35 0.60 Uncertain political environment w here political uncertainty related alliances are changing rapidly, and uncertainty over uncertainty w ho will w in the 2011 presidential election risk that related to mistrust policy 0.30 betw een President upcoming political tightening on elections Levingstom and uncertainty related top of drought 0.50 his commanders uncertainty related to to the dismissal of uncertainty, poor economic could tip in chief expresident Juan economy minister-- Argentina Peron and military Domingo Cavallo prospects, high Deteriorating 0.25 President Lanussee unemployment, fiscal and into a deeper, uncertainty related and w hether longer and upcoming President Carlos financial financing 0.40 upcoming elections constraints and conditions and recession. political and uncertainty related and president, Michel elections Menem is still in a crisis in Brazil rising political economic privatisation under Temer, under uncertainty related to position to uncertainty 0.20 uncertainty related an uncertainty and President Itamar pressure to resign for political turmoil command Franco uncertainty heighten the Army coup by the possible bribery betw een the armed risk of a new return of ex- related forces and the uncertainty 0.30 General Lott sovereign President Jânio unfavorable Peronists related to a uncertainty related uncertainty default da Silva external 0.15 recession The resignation of related Quadros environment Miss Zelia upcoming uncertainty related to elections Cardoso de Mello, the election of 0.20 the formerly all- 0.10 President Carlos pow erful economy Menem minister and the the phasing dow n of the price freeze 0.05 0.10 0.00 0.00 Q1-1952 Q4-1953 Q3-1955 Q2-1957 Q1-1959 Q4-1960 Q3-1962 Q2-1964 Q1-1966 Q4-1967 Q3-1969 Q2-1971 Q1-1973 Q4-1974 Q3-1976 Q2-1978 Q1-1980 Q4-1981 Q3-1983 Q2-1985 Q1-1987 Q4-1988 Q3-1990 Q2-1992 Q1-1994 Q4-1995 Q3-1997 Q2-1999 Q1-2001 Q4-2002 Q3-2004 Q2-2006 Q1-2008 Q4-2009 Q3-2011 Q2-2013 Q1-2015 Q4-2016 Q3-2018 Q1-1952 Q4-1953 Q3-1955 Q2-1957 Q1-1959 Q4-1960 Q3-1962 Q2-1964 Q1-1966 Q4-1967 Q3-1969 Q2-1971 Q1-1973 Q4-1974 Q3-1976 Q2-1978 Q1-1980 Q4-1981 Q3-1983 Q2-1985 Q1-1987 Q4-1988 Q3-1990 Q2-1992 Q1-1994 Q4-1995 Q3-1997 Q2-1999 Q1-2001 Q4-2002 Q3-2004 Q2-2006 Q1-2008 Q4-2009 Q3-2011 Q2-2013 Q1-2015 Q4-2016 Q3-2018 29
Time coverage Greece Spain 0.25 uncertainty related to a 0.20 uncertainty related to uncertainty uncertainty referendum and uncertainty country's euro zone related to the related to the unilateral declaration of related to membership economy and coup by General independence in Catalonia 0.18 Phaidon Gizikis inconclusive politics elections uncertainty related to uncertainty related to speculation about the 0.16 the outcome of the 0.20 political future of the political uncertainty unceratinty elections--Andreas unceratinty related to prime minister, José Luis related to Papandreou economic General Francisco Rodríguez Zapatero related to the the recent elections 0.14 uncertainty and political unceratinty Franco's illness and economy related to uncertainty uncertainty related to the violence from unceratinty unceratinty the related to related to economy extremist groups related to related to 0.12 economy the sovereign- 0.15 upcoming the economy economy debt elections sustainability 0.10 and bank solvency and Grexit 0.08 0.10 0.06 0.04 0.05 0.02 0.00 0.00 Q1-1952 Q4-1953 Q3-1955 Q2-1957 Q1-1959 Q4-1960 Q3-1962 Q2-1964 Q1-1966 Q4-1967 Q3-1969 Q2-1971 Q1-1973 Q4-1974 Q3-1976 Q2-1978 Q1-1980 Q4-1981 Q3-1983 Q2-1985 Q1-1987 Q4-1988 Q3-1990 Q2-1992 Q1-1994 Q4-1995 Q3-1997 Q2-1999 Q1-2001 Q4-2002 Q3-2004 Q2-2006 Q1-2008 Q4-2009 Q3-2011 Q2-2013 Q1-2015 Q4-2016 Q3-2018 Q1-1952 Q4-1953 Q3-1955 Q2-1957 Q1-1959 Q4-1960 Q3-1962 Q2-1964 Q1-1966 Q4-1967 Q3-1969 Q2-1971 Q1-1973 Q4-1974 Q3-1976 Q2-1978 Q1-1980 Q4-1981 Q3-1983 Q2-1985 Q1-1987 Q4-1988 Q3-1990 Q2-1992 Q1-1994 Q4-1995 Q3-1997 Q2-1999 Q1-2001 Q4-2002 Q3-2004 Q2-2006 Q1-2008 Q4-2009 Q3-2011 Q2-2013 Q1-2015 Q4-2016 Q3-2018 30
Time coverage China United Kingdom 0.45 0.20 uncertainty implications of Uncertainty over how 0.40 the Brexit 0.18 related to future leadership uncertainty the cultural forthcoming elections and referendum transitions w ill be handled related to the verdict. revolution general a potential referendum on economic 1964 general 0.16 0.35 sharp fall in elections the UK's membership of and political the EU. stock uncertainty uncertainty related exchange 0.14 to the transition to prices general 0.30 economic a younger uncertainty about general generation of opposition to 0.12 uncertainty economic the outcome of political leaders join the EEC uncertainty 0.25 Brexit (European negotiations Economic 0.10 Community). 0.20 0.08 Great Recession 0.15 0.06 0.04 0.10 0.02 0.05 0.00 0.00 Q1-1952 Q4-1953 Q3-1955 Q2-1957 Q1-1959 Q4-1960 Q3-1962 Q2-1964 Q1-1966 Q4-1967 Q3-1969 Q2-1971 Q1-1973 Q4-1974 Q3-1976 Q2-1978 Q1-1980 Q4-1981 Q3-1983 Q2-1985 Q1-1987 Q4-1988 Q3-1990 Q2-1992 Q1-1994 Q4-1995 Q3-1997 Q2-1999 Q1-2001 Q4-2002 Q3-2004 Q2-2006 Q1-2008 Q4-2009 Q3-2011 Q2-2013 Q1-2015 Q4-2016 Q3-2018 Q1-1952 Q4-1953 Q3-1955 Q2-1957 Q1-1959 Q4-1960 Q3-1962 Q2-1964 Q1-1966 Q4-1967 Q3-1969 Q2-1971 Q1-1973 Q4-1974 Q3-1976 Q2-1978 Q1-1980 Q4-1981 Q3-1983 Q2-1985 Q1-1987 Q4-1988 Q3-1990 Q2-1992 Q1-1994 Q4-1995 Q3-1997 Q2-1999 Q1-2001 Q4-2002 Q3-2004 Q2-2006 Q1-2008 Q4-2009 Q3-2011 Q2-2013 Q1-2015 Q4-2016 Q3-2018 31
0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35 1952q1 1955q4 1959q3 1963q2 1967q1 1970q4 1974q3 1978q2 1982q1 1985q4 1989q3 1993q2 World Uncertainty Index: 1997q1 (1952q1 to 2019Q3, simple average) 2000q4 2004q3 2008q2 2012q1 2015q4 2019q3 0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35 1952q1 1955q4 1959q3 1963q2 Time coverage 1967q1 1970q4 1974q3 1978q2 1982q1 1985q4 1989q3 1993q2 World Uncertainty Index: 1997q1 2000q4 (1952Q1 to 2019Q3, GDP weighted average) 2004q3 2008q2 2012q1 2015q4 2019q3 32
Trade uncertainty (WTU) Note: The font in blue indicates the tariff measure taken, and the font in black indicates the narrative of the World Trade Uncertainty index. A higher number means higher trade uncertainty and vice versa. The source for the data on key dates in the US-China trade negotiations comes from Bown and Kolb (2019). 33
Trade uncertainty (WTU) 34
0.00 0.02 0.04 0.06 0.08 0.10 0.12 0.14 0.16 0.18 0.20 Q1-1996 Q4-1996 Q3-1997 Q2-1998 Q1-1999 Q4-1999 correlation: 0.7 Q3-2000 Q2-2001 Q1-2002 Q4-2002 Q3-2003 Q2-2004 Q1-2005 Q4-2005 WUI Q3-2006 Q2-2007 Q1-2008 Q4-2008 Q3-2009 Q2-2010 Q1-2011 FED (right axis) Q4-2011 Q3-2012 Q2-2013 Monetary policy uncertainty Q1-2014 Q4-2014 Q3-2015 40 90 140 190 240 35
THE WORLD UNCERTAINTY INDEX Hites Ahir (IMF), Nick Bloom (Stanford University) and Davide Furceri (IMF) ASSA San Diego—January 2020
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