News narratives explain diverging economic uncertainty signals
A Banco de España working paper reveals that economic uncertainty indicators often diverge because each captures a distinct dimension. The study uses topic modeling on national news to classify these divergences, finding political drivers for EPU peaks and financial market stress for CLIFS peaks.
Unpacking the uncertainty paradox
The paper addresses the puzzle of diverging economic uncertainty indicators, such as the text-based Economic Policy Uncertainty (EPU) index and the market-based Country-Level Index of Financial Stress (CLIFS).
It posits that this divergence is not a flaw but a reflection of distinct uncertainty dimensions.
Researchers applied topic modeling to national news corpora across five European countries to construct a taxonomy of uncertainty narratives.
This allowed them to classify episodes where EPU and CLIFS signals diverged.
The findings reveal systematic patterns: EPU peaks are primarily driven by political and institutional developments, while CLIFS peaks correlate with financial market stress.
Joint peaks, conversely, coincide with systemic crises, underscoring the multidimensional nature of economic uncertainty.
Beyond measurement error
The proliferation of economic uncertainty indicators, from the VIX to various text-based indices, has enriched analytical tools but also created conflicting signals.
Policymakers, including ECB President Christine Lagarde and IMF Managing Director Kristalina Georgieva, have acknowledged this growing disconnect between financial market volatility and policy uncertainty.
Previous research by Yang (2025) and Aït-Sahalia and Xiu (2025) confirms that these divergences are not measurement errors but reflect the multidimensional nature of uncertainty, with different indicators responding to distinct underlying shocks and time horizons.
The study builds on this by providing a structured framework to interpret these discrepancies.
A clearer lens for complex times
This research offers a crucial step towards a more nuanced understanding of economic uncertainty, moving beyond simplistic interpretations of diverging signals.
By linking narrative content to indicator behavior, it provides policymakers with practical tools to better interpret the complex informational environment.
The findings highlight the imperative for structured interpretative frameworks in an era where uncertainty is increasingly multifaceted.