Uncertainty has remained a concept central to economics for almost as long as the science has existed. The literature has exploded in recent years, as breakthroughs in modeling and measurement have allowed researchers to identify both the theoretical impacts of heightened uncertainty under varying assumptions, and the likely empirical manifestations of these impacts. This paper provides a review of the latest developments in this literature and provides new evidence of the impact of uncertainty on economic activity.
We proceed in a number of steps. First, we situate the modern literature on policy uncertainty in the history of economic thought, as past quandaries and debates in the field presage many of those that continue. Second, we review the contemporary theory-focused literature. Though the literature has developed a number of models, the lack of congruity between theory and empirical calibration seems to remain an area for future work in the field to fill. Third, we review the indices that have been constructed in attempts to quantify uncertainty and facilitate its empirical study. The differences among various indices developed to date reflect conceptual fault lines concerning what constitutes “uncertainty” that have existed in the field since the 1920s.
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