Macroeconomic uncertainty what is it, how can we measure it.pdfVIP

100 Quarterly Bulletin 2013 Q2 Macroeconomic uncertainty: what is it, how can we measure it and why does it matter? By Abigail Haddow and Chris Hare of the Bank’s Conjunctural Assessment and Projections Division, John Hooley of the Bank’s International Finance Division and Tamarah Shakir of the Bank’s Macroprudential Strategy Division.(1)(2) The onset of the financial crisis in 2008 brought an end to the ‘Great Stability’ period, making prospects for UK and global economic growth appear not just weaker, but more uncertain. This elevated uncertainty is likely to have adversely affected spending decisions and contributed to the depth of the recent recession and the weakness of the recovery. While uncertainty is not directly observable, this article constructs an aggregate measure of the economic uncertainty faced by households and companies, based on a number of proxy indicators. It also provides some quantitative analysis of the impact of uncertainty on economic activity, drawing a distinction between shocks to uncertainty that are short-lived and those that are more persistent. Since mid-2008, the UK economy has faced an unprecedented Chart 1 Uncertainty and GDP series of large adverse shocks that have led companies and households to become more uncertain about future economic Standard deviations from mean Percentage change on (1985–2012) previous year 3 8 prospects. These shocks include one of the United Kingdom’s largest ever financial crises, continuing headwinds from the 2 GDP (right-hand scale) 6 euro-area debt