Indicators of Uncertainty: A Brief User’s Guide

30 Pages Posted: 27 Jul 2020

Date Written: June 26, 2020

Abstract

This work examines the benefits and risks of using available classes of uncertainty indexes for policy purposes, clustered in three broad categories: survey-based, model-based, and news-based. In both policy discussions and the academic literature news-based indexes are the ones that have recently gained the most attention. We argue that the reasons behind this are their intuitiveness, transparency and real-time characteristics. The main trouble with these indexes, as they are constructed today, is their noisiness. We then suggest that, for policy purposes, it would be better to disregard very high frequency movements in the series. Finally, we highlight that well-developed probabilistic surveys still represent a hard-to-beat benchmark when one is interested in uncertainty concerning specific variables as opposed to more abstract concepts such as Economic Policy Uncertainty.

Keywords: uncertainty, filtering, economic surveys, news

JEL Classification: E60, H30, H68

Suggested Citation

Rossi, Luca, Indicators of Uncertainty: A Brief User’s Guide (June 26, 2020). Bank of Italy Occasional Paper No. 564, Available at SSRN: https://ssrn.com/abstract=3659971 or http://dx.doi.org/10.2139/ssrn.3659971

Luca Rossi (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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