Economic Uncertainty before and during the COVID-19 Pandemic

July 10, 2020

David E. Altig Executive Vice President and Chief Economic Adviser

Scott Brent Baker University of Wisconsin

Jose Maria Barrero Instituto Tecnológico Autónomo de México Business School

Nicholas Bloom Visiting Scholar and Stanford University

Philip Bunn Bank of England

Scarlet Chen Stanford University

Steven J. Davis Visiting Scholar, Hoover Institution, and Stanford Institute for Economic Policy Research

Brent Meyer Vice President and Senior Economist

Emil Mihaylov Quantitative Research Analysis Specialist

Paul Mizen King's College London

Nick Parker (Former) Director of Surveys

Thomas Renault University Paris-Saclay

Pawel Smietanka Bank of England

Greg Thwaites University of Nottingham

• Working Papers
• Publication
• Macroeconomy

Working Paper 2020-9

Abstract: We consider several economic uncertainty indicators for the United States and the UK before and during the COVID-19 pandemic: implied stock market volatility, newspaper-based economic policy uncertainty, twitter chatter about economic uncertainty, subjective uncertainty about future business growth, and disagreement among professional forecasters about future gross domestic product growth. Three results emerge. First, all indicators show huge uncertainty jumps in reaction to the pandemic and its economic fallout. Indeed, most indicators reach their highest values on record. Second, peak amplitudes differ greatly—from an 80 percent rise (relative to January 2020) in two-year implied volatility on the S&P 500 to a 20-fold rise in forecaster disagreement about UK growth. Third, time paths also differ: implied volatility rose rapidly from late February and peaked in mid-March, falling back by late March as stock prices began to recover. In contrast, broader measures of uncertainty peaked later and then plateaued, as job losses mounted, highlighting the difference in uncertainty measures between Wall Street and Main Street.

JEL classification: D80, E22, E66, G18, L50

Key words: forward-looking uncertainty measures, volatility, COVID-19, coronavirus

Digital Object Identifier: https://doi.org/10.29338/wp2020-09

The authors thank the U.S. National Science Foundation, the Sloan Foundation, the University of Chicago Booth School of Business, and the Economic and Social Research Council for financial support. They also thank Mike Clements and Martin Weale for comments on an earlier draft, Ian Dew-Becker for supplying data on the 24-month VIX, and Niall Ferguson for pointers to the literature on excess mortality in previous pandemics. This paper expands and extends parts of Baker, Bloom, Davis, and Terry (2020). The views expressed here are those of the authors and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.

Please address questions regarding content to Dave Altig, Scott Brent Baker, Jose Maria Barrero, Nick Bloom, Phil Bunn, Scarlet Chen, Steven J. Davis, Brent Meyer, Emil Mihaylov, Paul Mizen, Nick Parker, Pawel Smietanka, and Greg Thwaites.

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