B. Lee (2011), “Time-varying rare disaster risk and stock returns”, Journal of Financial Economics 101 (2). 4  These include demographics, inequality, lower public investment, saving in emerging markets, higher credit spreads, cheaper capital goods, and lower trend growth. See Rachel, L and Smith, T (2015), “Secular drivers of the global real interest rate”, Bank of England Staff Working Paper. 2  BIS central bankers’ speeches  automation of jobs and of trade for their location; and the consequences of bigger, more global markets for “winner takes all” patterns of compensation. These secular trends can be reinforced by more cyclical moves (Chart 2).5 Cyclical economic uncertainty spiked during the crisis, remained very subdued until last autumn, and has since been on the rise. The last of the uncertainty trinity is policy uncertainty.6 It is reduced when there are clear policy remits, frameworks, and institutional structures that empower and discipline fiscal, monetary and regulatory authorities. It is elevated when these are absent. And it is influenced by the effectiveness of the tools available to central banks, the clarity of their policy strategies and, crucially, the transparency of their communications. Chart 2 UK economic uncertainty spiked after the failure of Lehman Brothers  Source: Bank calculations and Haddow et al (ibid.). Shows data to end-May. In recent years, policy uncertainty has increased globally. In some jurisdictions, fiscal frameworks have been questioned; in others, exchange rate regimes. And with very low interest rates and expanding unconventional policies, the efficacy of monetary policy itself has been questioned.

The heady days of the Great Moderation were restrained by geopolitical uncertainty. During the financial and euro crises, by contrast, economic uncertainty dominated. And from 2012 onwards, with the abatement of the acute phase of the euro-area crisis, economic uncertainty began to fall back, only to be replaced by renewed geopolitical tensions and now sharply higher policy uncertainty (Chart 4). Chart 3 UK economic policy uncertainty has increased since the global financial crisis, rising sharply higher in early 2016  Source: Bank calculations and Baker et al, (2015), ibid. Chart 4 Three eras of uncertainty: geopolitical from 9/11 to 2008; economic uncertainty from 2008 to 2012; and policy uncertainty today  Source: Bank calculations and authors cited in Charts 1–3 above. Economic policy and geopolitical uncertainty indices are de-meaned and shown relative to their respective standard deviations. Chart shows two-year centred moving average for each measure. 4  BIS central bankers’ speeches  2. What do the combined effects of uncertainty mean? All this uncertainty has contributed to a form of economic post-traumatic stress disorder amongst households and businesses, as well as in financial markets – that is, a heightened sensitivity to downside tail risks, a growing caution about the future, and an aversion to assets or irreversible decisions that may be exposed to future “disaster risk”.7 There may be an affect heuristic at work. Put simply, long after the original trigger becomes remote, perceptions endure. They become embedded in economic narratives and their salience persistently affects risk perceptions and economic behaviour.