Uncertainty Fluctuations: Measures, Effects and Macroeconomic Policy Challenges

“The outlook is subject to considerable uncertainty from multiple sources, and dealing with these uncertainties is an important feature of policymaking.” Janet L. Yellen, Chair of the Board of Governors of the Federal Reserve System, speech “Inflation, Uncertainty, and Monetary Policy” given the 26 September 2017. There has been a strong focus in recent policy debates, on the various types of uncertainty in the global economy from economic policy uncertainty to financial volatility. This Policy Brief presents the key challenges raised by this phenomena: How to measure uncertainty? Through which channels does uncertainty impact the economy? What are the implications of uncertainty for policy makers? We show evidence from the literature that uncertainty has adverse effects on the economic activity and draw three lessons for policy-makers facing increasing uncertainties. First, macroeconomic policies have a direct role to play in stabilizing policy-related uncertainty. Second, financial uncertainty should be modulated through financial regulation. Third, the effectiveness of economic stabilization policies depends on the state of uncertainty and should be adapted accordingly.