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The World Uncertainty Index

May 2019
Working Paper
19-027
By  Hites Ahir, Nicholas Bloom and Davide Furceri

We construct a new index of uncertainty — the World Uncertainty Index (WUI) — for 143 individual countries on a quarterly basis from 1996 onwards, and for 34 large advanced and emerging market economies from 1955. This is defined using the frequency of the word “uncertainty” in the quarterly Economist Intelligence Unit country reports. Globally, the Index spikes near the 9/11 attack, the SARS outbreak, the Gulf War II, the failure of Lehman Brothers, the Euro debt crisis, El Niño, the European border crisis, the UK Brexit vote, the 2016 US election and the recent US-China trade tensions. Uncertainty spikes tend to be more synchronized within advanced economies and between economies with tighter trade and financial linkages. The level of uncertainty is significantly higher in developing countries and is positively associated with economic policy uncertainty and stock market volatility, and negatively with GDP growth. In addition, there is an inverted U-shaped relationship between uncertainty and democracy. In a panel vector autoregressive setting, we find that innovations in the WUI foreshadow significant declines in output. This effect varies across countries and across sectors within the same country: across countries, the effect is larger and more persistent in those with lower institutional quality; across sectors, the effect is stronger in those more financially-constrained.

Publication Keywords: 
uncertainty; political uncertainty; economic uncertainty; volatility.