COVID-induced economic uncertainty

Assessing the economic impact of the COVID-19 pandemic is essential for policymakers, but challenging because the crisis has unfolded with extreme speed. This paper identifies three indicators – stock market volatility, newspaper-based economic uncertainty, and subjective uncertainty in business expectation surveys – that provide real-time forward-looking uncertainty measures. The authors use these indicators to document and quantify the enormous increase in economic uncertainty in the past several weeks.

The authors also illustrate how these forward-looking measures can be used to assess the macroeconomic impact of the COVID-19 crisis. Specifically, they feed COVID-induced first-moment and uncertainty shocks into an estimated model of disaster effects developed by Baker, Bloom and Terry (2020). The illustrative exercise implies a year-on-year contraction in US real GDP of nearly 11 per cent as of 2020 Q4, with a 90 per cent confidence interval extending to a nearly 20 per cent contraction. The exercise says that about half of the forecasted output contraction reflects a negative effect of COVID-induced uncertainty.