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Characteristics of Uncertainty Indices in the Macroeconomy


October 7, 2020
Takeshi Shinohara*1
Tatsushi Okuda*2
Jouchi Nakajima*3


In macroeconomics, a variety of uncertainty indices have been proposed to quantitatively assess developments in uncertainty of the macroeconomy. This paper empirically investigates the time series properties of major uncertainty indices and their relationship with macroeconomic variables, using U.S. and Japanese data. Specifically, we analyze: (i) the Macroeconomic Uncertainty Index, (ii) the Economic Surprise Index, (iii) the Volatility Index, and (iv) the Economic Policy Uncertainty (EPU) Index. The empirical analysis for the U.S. shows that, except for EPU, these indices share similar developments and can significantly explain the business cycle fluctuations of investment, durable consumption, and the lending attitude of banks. In contrast, the empirical analysis for Japan reveals significant heterogeneities in the characteristics of the indices. The Macroeconomic Uncertainty Index (i), responds to various events and shows a significant relationship with investment and durable consumption. On the contrary, the Economic Surprise Index (ii), barely reacts to the events and exhibits limited performance in explaining business cycles. The Volatility Index (iii), tends to rise when the financial system is stressed, whereas the Economic Policy Uncertainty Index (iv), is likely to respond to overseas events, and both of these indices can significantly explain business cycle fluctuations of investment and the lending attitudes of banks.

JEL classification
E32, E52.

Uncertainty, Business cycle.

The authors thank Kosuke Aoki, Ryo Jinnai, Seisaku Kameda, Kazushige Kamiyama, Takuji Kawamoto, Takashi Nagahata, Teppei Nagano, Koji Takahashi, Yoichi Ueno, Francesco Zanetti, and the staff at the Bank of Japan for their valuable comments. Any remaining errors are the sole responsibility of the authors. The views expressed in this paper are those of the authors and do not necessarily reflect the official views of the Bank of Japan.

  1. *1Research and Statistics Department, Bank of Japan
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  2. *2Research and Statistics Department, Bank of Japan (currently, Financial System and Bank Examination Department)
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  3. *3Research and Statistics Department, Bank of Japan
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