Ok, so I may be hyper sensitive to this stuff, but is seems to me that, over the past six months or so, increasing attention has focused on the pernicious effects of uncertainty on global economic prospects. To be sure, this isn't entirely surprising given the game of chicken played out at the edge of the U.S. fiscal cliff just a couple of months ago and the threat of deflation that looms menacingly over the euro zone. But still, the notion that there is an unusual degree of uncertainty has seemingly gained traction; that — dare I say it — we live in a New Age of Uncertainty.

Consider the evidence. First, in August, the IMF Multilateral Policy Issues Report highlighted the spillovers from policy uncertainty in the U.S. and Europe, here (PDF). The Fund staff argued that policy uncertainty affects economic activity in other regions by reducing investment. Regular readers of this blog, if such a creature exists, know what comes next: this effect reflects the option value of waiting under uncertainty. Investments entail large up-front costs and returns that accrue over time. In periods of uncertainty, when firms are less able to evaluate the future stream of those returns, firms may decide to exercise the option of waiting —to defer the investment —until such time as they are better able to assess the future. Of course, if enough firms do likewise, what is sensible and sound from the individual perspective becomes damaging and, in a sense, imprudent in the aggregate.

Second, the Bank of England has published a very interesting paper on macroeconomic uncertainty — what it is, how it can be measured and why it matters — here (PDF). The authors present an indicator of aggregate uncertainty that has a striking correlation with output (caveat lector: their chart 1 shows standard deviations from mean uncertainty indicator versus percentage change of output). I have a small quibble with their definition of "uncertainty" which the authors ascribe to a "fattening of tails" of distribution, rather than Frank Knight's concept — as I understand it — of an inability to assess likelihood. But that may be a semantic issue: some definition, such as the one adopted by the Bank of England team, is necessary for empirical work.

Next, consider the fact the Federal Reserve Bank of Dallas hosted a conference in early October on the causes and macroeconomic consequences of uncertainty. See the conference program, here.

Finally, just in case you are thinking that this is all something that just economists worry about, the Atlantic Monthly had an article on "The New American Dream in an Age of Uncertainty."

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  • James A. Haley

    James A. Haley has been a CIGI senior fellow since September 2014. He is currently public policy fellow at the Woodrow Wilson International Center for Scholars in Washington, DC.