The economic effects of uncertainty
The article examines the measurement of economic uncertainty and its effects in the context of Trump’s trade policy.
Uncertainty is measured using three main indices: the VIX stock market “fear gauge,” the Economic Policy Uncertainty (EPU) index based on text analysis of news, and the Geopolitical Risk (GPR) index. Economic policy uncertainty rose in January 2025 to levels close to those seen during the COVID-19 pandemic due to Trump’s tariff measures, and the OECD subsequently lowered its global growth forecast.
The effects of uncertainty vary: it can act either as a supply shock, raising prices, or as a demand shock, reducing both prices and output. Russia’s war in Ukraine increased euro area inflation through supply disruptions, while the Gaza conflict reduced inflation by weakening demand. (AI translation)
- Juho Koistinen
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