Fluctuations in Uncertainty

Uncertainty is an amorphous concept. It reflects uncertainty in the minds of consumers, managers, and policymakers about possible futures. It is also a broad concept, including uncertainty over the path of macro phenomena like GDP growth, micro phenomena like the growth rate of firms, and noneconomic events like war and climate change. In this essay, I address four questions about uncertainty. First, what are some facts and patterns about economic uncertainty? Both macro and micro uncertainty appear to rise sharply in recessions and fall in booms. Uncertainty also varies heavily across countries—developing countries appear to have about one-third more macro uncertainty than developed countries. Second, why does uncertainty vary during business cycles? Third, do fluctuations in uncertainty affect behavior? Fourth, has higher uncertainty worsened the Great Recession and slowed the recovery? Much of this discussion is based on research on uncertainty from the last five years, reflecting the recent growth of the literature.