Uncertainty about how policy-makers will affect the economy can lead to underinvestment by firms, reduced hiring and slowed consumer spending.
In the last five years, the average global uncertainty index has been about 60 percent higher than in previous years, surpassing even the period around the 2008 housing crisis and recession. Most of the recent increases have been driven by events in other nations — most notably the Brexit decision, which caused a massive spike in Europe and was felt as far away as Japan. (See annotated versions of the indexes with major events marked on the project's website.)
Brazil is facing a down economy, a spate of corruption charges and the impeachment of its president. Turkey recently blocked a coup and had its credit rating downgraded, while military conflicts, political changes and other disputes have raised policy questions in Russia, China and Syria. Those economic uncertainties can influence short-term hiring decisions, as well as long-term plans for factory construction or expansion.
"The elevated levels of global policy uncertainty in the past five years compared to even the crisis years of 2008-09 is remarkable," Davis wrote in the paper. "They have contributed to the disappointing performance of the global economy in recent years. By how much is an open question and an active area of research."
The indexes are designed to be be a measurement that can be used to answer research questions about how uncertainty plays into long-term changes in the economy. But the timely information they provide is also used by hedge fund managers and other market participants to make decisions. Firms like BlackRock have used the concept to construct their own in-house indexes, Davis said.
"There is a lot of information about economic sentiment that doesn't get totally reflected in standard economics statistics," Davis said. "Newspapers have been around for decades in essentially their current form, so once it can be read in an automated manner it's a tremendous data source just waiting to be tapped that has been largely unused."