IDEAS home Printed from https://ideas.repec.org/p/not/notcfc/2020-07.html
   My bibliography  Save this paper

Economic uncertainty before and during the COVID-19 pandemic

Author

Listed:
  • Dave Altig
  • Scott Baker
  • Jose Maria Barrero
  • Nick Bloom
  • Phil Bunn
  • Scarlet Chen
  • Steven J Davis
  • Julia Leather
  • Brent Meyer
  • Emil Mihaylov
  • Paul Mizen
  • Nick Parker
  • Thomas Renault
  • Pawel Smietanka
  • Grey Thwaites

Abstract

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. Four results emerge. First, all indicators show huge uncertainty jumps in reaction to the pandemic and its economic fallout. Indeed, most indicators reach their highest values on record. Second, peak amplitudes differ greatly – from a 35% rise for the model-based measure of US economic uncertainty (relative to January 2020) to a 20-fold rise in forecaster disagreement about UK growth. Third, time paths also differ: Implied volatility rose rapidly from late February, peaked in mid-March, and fell back by late March as stock prices began to recover. In contrast, broader measures of uncertainty peaked later and then plateaued, as job losses mounted, highlighting differences between Wall Street and Main Street uncertainty measures. Fourth, in Cholesky-identified VAR models fit to monthly U.S. data, a COVID-size uncertainty shock foreshadows peak drops in industrial production of 12-19%.

Suggested Citation

  • Dave Altig & Scott Baker & Jose Maria Barrero & Nick Bloom & Phil Bunn & Scarlet Chen & Steven J Davis & Julia Leather & Brent Meyer & Emil Mihaylov & Paul Mizen & Nick Parker & Thomas Renault & Pawel, 2020. "Economic uncertainty before and during the COVID-19 pandemic," Discussion Papers 2020/07, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
  • Handle: RePEc:not:notcfc:2020/07
    as

    Download full text from publisher

    File URL: https://www.nottingham.ac.uk/cfcm/documents/papers/2020/cfcm-2020-07.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. N. Bloom, 2016. "Fluctuations in uncertainty," Voprosy Ekonomiki, NP Voprosy Ekonomiki, issue 4.
    2. Ian Dew-Becker & Stefano Giglio, 2023. "Cross-Sectional Uncertainty and the Business Cycle: Evidence from 40 Years of Options Data," American Economic Journal: Macroeconomics, American Economic Association, vol. 15(2), pages 65-96, April.
    3. Giuseppe Bertola & Luigi Guiso & Luigi Pistaferri, 2005. "Uncertainty and Consumer Durables Adjustment," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 72(4), pages 973-1007.
    4. Nicholas Bloom & Philip Bunn & Scarlet Chen & Paul Mizen & Pawel Smietanka & Gregory Thwaites, 2019. "The Impact of Brexit on UK Firms," NBER Working Papers 26218, National Bureau of Economic Research, Inc.
    5. Oscar Jorda & Sanjay R. Singh & Alan M. Taylor, 2022. "Longer-Run Economic Consequences of Pandemics," The Review of Economics and Statistics, MIT Press, vol. 104(1), pages 166-175, March.
    6. Andrew B. Abel & Janice C. Eberly, 1996. "Optimal Investment with Costly Reversibility," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 63(4), pages 581-593.
    7. Lubos Pástor & Pietro Veronesi, 2012. "Uncertainty about Government Policy and Stock Prices," Journal of Finance, American Finance Association, vol. 67(4), pages 1219-1264, August.
    8. Kyle Jurado & Sydney C. Ludvigson & Serena Ng, 2015. "Measuring Uncertainty," American Economic Review, American Economic Association, vol. 105(3), pages 1177-1216, March.
    9. Martin S Eichenbaum & Sergio Rebelo & Mathias Trabandt, 2021. "The Macroeconomics of Epidemics [Economic activity and the spread of viral diseases: Evidence from high frequency data]," The Review of Financial Studies, Society for Financial Studies, vol. 34(11), pages 5149-5187.
    10. James H. Stock, 2020. "Data Gaps and the Policy Response to the Novel Coronavirus," NBER Working Papers 26902, National Bureau of Economic Research, Inc.
    11. Scott R. Baker & Nicholas Bloom & Steven J. Davis & Stephen J. Terry, 2020. "COVID-Induced Economic Uncertainty," NBER Working Papers 26983, National Bureau of Economic Research, Inc.
    12. Veronica Guerrieri & Guido Lorenzoni & Ludwig Straub & Iván Werning, 2022. "Macroeconomic Implications of COVID-19: Can Negative Supply Shocks Cause Demand Shortages?," American Economic Review, American Economic Association, vol. 112(5), pages 1437-1474, May.
    13. Nicholas Bloom & Ian Wright & Jose Maria Barrero, 2016. "Short- and Long-run Uncertainty," 2016 Meeting Papers 1576, Society for Economic Dynamics.
    14. Scott R. Baker & Nicholas Bloom & Steven J. Davis, 2016. "Measuring Economic Policy Uncertainty," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 131(4), pages 1593-1636.
    15. Andrew Atkeson, 2020. "What Will be the Economic Impact of COVID-19 in the US? Rough Estimates of Disease Scenarios," Staff Report 595, Federal Reserve Bank of Minneapolis.
    16. Chris Woolston, 2014. "Rice," Nature, Nature, vol. 514(7524), pages 49-49, October.
    17. Andrew Atkeson, 2020. "How Deadly is COVID-19? Understanding the Difficulties with Estimation of its Fatality Rate," Staff Report 598, Federal Reserve Bank of Minneapolis.
    18. Ben S. Bernanke, 1983. "Irreversibility, Uncertainty, and Cyclical Investment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 98(1), pages 85-106.
    19. Jose Maria Barrero & Nicholas Bloom & Steven J. Davis, 2020. "COVID-19 Is Also a Reallocation Shock," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 51(2 (Summer), pages 329-383.
    20. Altig, David & Barrero, Jose Maria & Bloom, Nicholas & Davis, Steven J. & Meyer, Brent & Parker, Nicholas, 2022. "Surveying business uncertainty," Journal of Econometrics, Elsevier, vol. 231(1), pages 282-303.
    21. Hassan, Tarek & Hollander, Stephan & van Lent, Laurence & Schwedeler, Markus & Tahoun, Ahmed, 2020. "Firm-Level Exposure to Epidemic Diseases: Covid-19, SARS, and H1N1," CEPR Discussion Papers 14573, C.E.P.R. Discussion Papers.
    22. Lawrence J. Christiano & Roberto Motto & Massimo Rostagno, 2014. "Risk Shocks," American Economic Review, American Economic Association, vol. 104(1), pages 27-65, January.
    23. Dean Croushore & Tom Stark, 2019. "Fifty Years of the Survey of Professional Forecasters," Economic Insights, Federal Reserve Bank of Philadelphia, vol. 4(4), pages 1-11, October.
    24. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    25. Scott R Baker & Nicholas Bloom & Steven J Davis & Kyle Kost & Marco Sammon & Tasaneeya Viratyosin & Jeffrey Pontiff, 0. "The Unprecedented Stock Market Reaction to COVID-19," The Review of Asset Pricing Studies, Society for Financial Studies, vol. 10(4), pages 742-758.
    26. Alexis Akira Toda, 2020. "Susceptible-Infected-Recovered (SIR) Dynamics of COVID-19 and Economic Impact," Papers 2003.11221, arXiv.org, revised Mar 2020.
    27. James D. Hamilton, 2018. "Why You Should Never Use the Hodrick-Prescott Filter," The Review of Economics and Statistics, MIT Press, vol. 100(5), pages 831-843, December.
    28. repec:aei:rpaper:1008560098 is not listed on IDEAS
    29. repec:fip:a00002:88079 is not listed on IDEAS
    30. repec:fip:a00002:87872 is not listed on IDEAS
    31. Laura Alfaro & Anusha Chari & Andrew N. Greenland & Peter K. Schott, 2020. "Aggregate and Firm-Level Stock Returns During Pandemics, in Real Time," NBER Working Papers 26950, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Scott R. Baker & Nicholas Bloom & Steven J. Davis & Stephen J. Terry, 2020. "COVID-Induced Economic Uncertainty," NBER Working Papers 26983, National Bureau of Economic Research, Inc.
    2. Jesus Fernandez-Villaverde & Pablo Guerron-Quintana, 2020. "Uncertainty Shocks and Business Cycle Research," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 37, pages 118-166, August.
    3. Drobetz, Wolfgang & El Ghoul, Sadok & Guedhami, Omrane & Janzen, Malte, 2018. "Policy uncertainty, investment, and the cost of capital," Journal of Financial Stability, Elsevier, vol. 39(C), pages 28-45.
    4. Josué Diwambuena & Jean-Paul K. Tsasa, 2021. "The Real Effects of Uncertainty Shocks: New Evidence from Linear and Nonlinear SVAR Models," BEMPS - Bozen Economics & Management Paper Series BEMPS87, Faculty of Economics and Management at the Free University of Bozen.
    5. Pedro Costa Ferreira & Raíra Marotta B. Vieira & Felipi Bruno Silva & Ingrid C. L. Oliveira, 2019. "Measuring Brazilian Economic Uncertainty," Journal of Business Cycle Research, Springer;Centre for International Research on Economic Tendency Surveys (CIRET), vol. 15(1), pages 25-40, April.
    6. Danilo Cascaldi-Garcia & Cisil Sarisoy & Juan M. Londono & Bo Sun & Deepa D. Datta & Thiago Ferreira & Olesya Grishchenko & Mohammad R. Jahan-Parvar & Francesca Loria & Sai Ma & Marius Rodriguez & Ilk, 2023. "What Is Certain about Uncertainty?," Journal of Economic Literature, American Economic Association, vol. 61(2), pages 624-654, June.
    7. Cezar, Rafael & Gigout, Timothée & Tripier, Fabien, 2020. "Cross-border investments and uncertainty: Firm-level evidence," Journal of International Money and Finance, Elsevier, vol. 108(C).
    8. Caggiano, Giovanni & Castelnuovo, Efrem & Delrio, Silvia & Kima, Richard, 2021. "Financial uncertainty and real activity: The good, the bad, and the ugly," European Economic Review, Elsevier, vol. 136(C).
    9. Çakmaklı, Cem & Demiralp, Selva & Özcan, Şebnem Kalemli & Yeşiltaş, Sevcan & Yıldırım, Muhammed A., 2023. "COVID-19 and emerging markets: A SIR model, demand shocks and capital flows," Journal of International Economics, Elsevier, vol. 145(C).
    10. Iván Alfaro & Nicholas Bloom & Xiaoji Lin, 2024. "The Finance Uncertainty Multiplier," Journal of Political Economy, University of Chicago Press, vol. 132(2), pages 577-615.
    11. Bańbura, Marta & Albani, Maria & Ambrocio, Gene & Bursian, Dirk & Buss, Ginters & de Winter, Jasper & Gavura, Miroslav & Giordano, Claire & Júlio, Paulo & Le Roux, Julien & Lozej, Matija & Malthe-Thag, 2018. "Business investment in EU countries," Occasional Paper Series 215, European Central Bank.
    12. Nguyen Thanh, Binh, 2020. "Macroeconomic uncertainty, the option to wait and IPO issue cycles," Finance Research Letters, Elsevier, vol. 32(C).
    13. N. Bloom, 2016. "Fluctuations in uncertainty," Voprosy Ekonomiki, NP Voprosy Ekonomiki, issue 4.
    14. Lorenzo Bretscher & Alex Hsu & Andrea Tamoni, 2019. "Response of the Macroeconomy to Uncertainty Shocks:the Risk Premium Channel," 2019 Meeting Papers 1567, Society for Economic Dynamics.
    15. Abel Brodeur & David Gray & Anik Islam & Suraiya Bhuiyan, 2021. "A literature review of the economics of COVID‐19," Journal of Economic Surveys, Wiley Blackwell, vol. 35(4), pages 1007-1044, September.
    16. Blanas, Sotiris & Oikonomou, Rigas, 2023. "COVID-induced economic uncertainty, tasks and occupational demand," Labour Economics, Elsevier, vol. 81(C).
    17. Kong, Edward & Prinz, Daniel, 2020. "Disentangling policy effects using proxy data: Which shutdown policies affected unemployment during the COVID-19 pandemic?," Journal of Public Economics, Elsevier, vol. 189(C).
    18. Shinohara, Takeshi & Okuda, Tatsushi & Nakajima, Jouchi, 2021. "Characteristics of Uncertainty Indices in the Macroeconomy," Economic Review, Hitotsubashi University, vol. 72(3), pages 246-267, July.
    19. Chang Ma & John Rogers & Sili Zhou, 2023. "Modern Pandemics: Recession and Recovery," Journal of the European Economic Association, European Economic Association, vol. 21(5), pages 2098-2130.
    20. Daniel Dejuán & Corinna Ghirelli, 2018. "Policy uncertainty and investment in Spain," Working Papers 1848, Banco de España.

    More about this item

    Keywords

    forward-looking uncertainty measures; volatility; COVID-19; coronavirus;
    All these keywords.

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E66 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General Outlook and Conditions
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • L50 - Industrial Organization - - Regulation and Industrial Policy - - - General

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:not:notcfc:2020/07. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Hilary Hughes (email available below). General contact details of provider: https://edirc.repec.org/data/cfnotuk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.