Scientists learned how to measure global economic uncertainty

The recent situation in the global economy is intuitively perceived through the prism of growing unpredictability: it is enough to name only a few events — the referendum on Brexit in the UK, the attempt of military coup in Turkey and the ensuing repression, the upcoming US presidential election — who are caught or can catch investors by surprise this year. Professor of international business and Economics, University of Chicago Steven Davis in October introduced a new global index of economic policy uncertainty (Index of Global Economic Policy Uncertainty), which confirms the market sensations ever-increasing risks and uncertainty.

Examples of events that give rise to economic uncertainty everywhere — from the United States and Western Europe to China and Russia, says Davis. “In Brazil the long and harsh recession, an extraordinary wave of corruption investigation and the recent impeachment of the President intertwined and turned the political landscape of the <…> In Turkey, repulsed the attempted coup, the government had arrested and dismissed hundreds of thousands of teachers, military officers, judges, mayors, civil servants <…> the Accession of Russia to the Crimea in 2014 and its military encroachments in Eastern Ukraine led to international sanctions and an uncertain climate which stopped foreign investment in Russia <…> the Aggressive behavior of China with the aim to consolidate its sovereign claims in the South China sea threatens trade on one of the busiest Maritime areas”, lists examples of Davis.

All these events and processes are sources of economic uncertainty, which in turn affects investment, labour demand, cost of financing, asset prices, etc., said the economist, referring to many theoretical studies.

The methodology for calculating the global index is built on the joint work of Davis and his colleagues from Stanford — Scott Baker and Nicholas bloom. For measurement uncertainties used machine and human analysis of newspaper publications in the country to identify the frequency of occurrence of the concept “uncertainty” in relation to Economics and politics. For example, to build a “Russian” national index is the number of articles containing Russian words “uncertain” or “uncertainty” in contexts associated with “taxes,” “spending,” “regulation,” “budget,” “Central Bank”, etc. in fact, the value of the index reflects the monthly proportion of newspaper articles discussing economic policy uncertainty.

The global index is constructed for monthly values of the national indices of 16 countries, including Australia, Brazil, Canada, France, Germany, Russia, as the average of these values, weighted by the GDP of these countries. The index is constructed in retrospect to 1997 and before, thanks to digital archives and using statistical regression, if the data is not enough.

Built by the Davis index shows a sharp rise during the Asian financial crisis and Russian default of 1998, the attacks of 11 September 2001 in the USA, the invasion of the Western coalition in Iraq in 2003, the global financial crisis of 2008-09, the European refugee crisis and the fall in the Chinese stock market in late 2015 (see chart). In June 2016, the index reached a record high amid the vote on Brexit. The average value of the index in the period from July 2011 to August 2016 is 60% higher than for the previous 14 years. But “even more impressive,” wrote Davis that the average value from July 2011 — 22% higher than during the global financial crisis of 2008-09, when it seemed that the uncertainty has reached a transcendent level. “These observations indicate that concerns with government policy (policy), in recent years become an even greater source of economic uncertainty,” emphasizes Davis.