Abstract

http://ssrn.com/abstract=2009451
 
 

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Has Economic Policy Uncertainty Hampered the Recovery?


Scott R. Baker


Kellogg School of Management - Department of Finance

Nicholas Bloom


Stanford University - Department of Economics; London School of Economics - Centre for Economic Performance (CEP); National Bureau of Economic Research (NBER)

Steven J. Davis


University of Chicago; National Bureau of Economic Research (NBER)

February 3, 2012

Becker Friedman Institute for Research in Economics Working Paper No. 2012-003

Abstract:     
The U.S. economy hit bottom in June 2009. Thirty months later, output growth remains sluggish and unemployment still hovers above 8%. A critical question is why. One view attributes the weak recovery, at least in part, to high levels of uncertainty about economic policy. This view entails two claims: First, that policy uncertainty is unusually high in recent years. Second, that high levels of policy uncertainty caused households and businesses to hold back significantly on spending, investment and hiring. We take a look at both claims in this article. We start by considering an index of economic policy uncertainty developed in Baker, Bloom and Davis (2012). Figure 1, which plots our index, indicates that economic policy uncertainty fluctuates strongly over time. The index shows historically high levels of economic policy uncertainty in the last four years. It reached an all-time peak in August 2011.

As discussed below, we also find evidence that policy concerns account for an unusually high share of overall economic uncertainty in recent years. Moreover, short-term movements in overall economic uncertainty more closely track movements in policy-related uncertainty in the past decade than earlier. In short, our analysis provides considerable support for the first claim of the policy uncertainty view.

The second claim is harder to assess because it raises difficult issues of what causes what. We do not provide a definitive analysis of the second claim. Nevertheless, our evidence suggests that policy uncertainty can damage the economy, and that high levels of policy uncertainty have been an important factor hampering the recovery. We find evidence that increases in economic policy uncertainty foreshadow declines in output, employment and investment. While we cannot say that economic policy uncertainty necessarily causes these negative developments – since many factors move together in the economy – we can say with some confidence high levels of policy uncertainty are associated with weaker growth prospects.

Number of Pages in PDF File: 14

Keywords: Policy uncertainty index, news-based uncertainty measure, tax-code expirations, forecaster disagreement, slow recovery

JEL Classification: E60, C43

working papers series


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Date posted: February 23, 2012  

Suggested Citation

Baker, Scott R. and Bloom, Nicholas and Davis, Steven J., Has Economic Policy Uncertainty Hampered the Recovery? (February 3, 2012). Becker Friedman Institute for Research in Economics Working Paper No. 2012-003. Available at SSRN: http://ssrn.com/abstract=2009451 or http://dx.doi.org/10.2139/ssrn.2009451

Contact Information

Scott R. Baker
Kellogg School of Management - Department of Finance ( email )
Evanston, IL 60208
United States
Nicholas Bloom
Stanford University - Department of Economics ( email )
Landau Economics Building, Room 231
579 Serra Mall
Stanford, CA 94305-6072
United States
650-725-7836 (Phone)
HOME PAGE: http://economics.stanford.edu/faculty/bloom
London School of Economics - Centre for Economic Performance (CEP) ( email )
Houghton Street
London WC2A 2AE
United Kingdom
+44 20 7955 7408 (Phone)
HOME PAGE: http://cep.lse.ac.uk/people/bio.asp?id=1498
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Steven J. Davis (Contact Author)
University of Chicago ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-7312 (Phone)
773-702-0458 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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