A Little-Known Index Measures Economic Uncertainty

Over the years, I’ve heard the adage “we live in uncertain times,” but can we quantify that statement? Can one point to evidence of living in uncertain times? Does uncertainty vary over time and between topics? The term uncertainty commonly defined as unknown expected outcomes and unknown probabilities.

A few academics (Baker, Bloom, and Davis, 2013) tried to solve this question and quantify economic uncertainty with the development of the Economic Policy Uncertainty Index (EPU). This little known index, EPU is attaining increased use among academics, practitioners, and government. The data is available on the website of the Federal Reserve Bank of St. Louis (FRED) among other locations. The U.S. EPU index data began in January 1985. The index developer’s National Bureau of Economic Research (NBER) paper demonstrates how the EPU performed back to 1900 (Baker, Bloom and Davis, 2015).] As they note in their paper “At the macro level, policy uncertainty innovations foreshadow declines in investment, output, and employment in the United States.”

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