Policy Uncertainty and Aggregate Fluctuations

37 Pages Posted: 22 Oct 2013

See all articles by Haroon Mumtaz

Haroon Mumtaz

University of London - School of Sciences

Paolo Surico

London Business School - Department of Economics; Centre for Economic Policy Research (CEPR)

Date Written: October 2013

Abstract

This paper estimates the impact on the US economy of four types of uncertainty about (i) government spending, (ii) tax changes, (iii) public debt sustainability and (iv) monetary policy. Following a one standard deviation shock, uncertainty about debt sustainability has the largest and most significant impact on real activity, with negative effects on output, consumption and investment after two years around 0.5%, 0.3% and 1.5% respectively. Uncertainty on the other economic policies has also detrimental consequences but these tend to be smaller and short-lived, especially for taxes and monetary policy. About 30% of output fluctuations are explained by policy uncertainty at most frequencies, with the lion’s share accounted for by debt sustainability. Our results are based on a new empirical framework that allows the volatility of identified shocks to have a direct impact on the endogenous variables of an otherwise standard structural VAR.

Keywords: debt sustainability, economic policy uncertainty, long-run effects.

JEL Classification: D80, E32, E63

Suggested Citation

Mumtaz, Haroon and Surico, Paolo, Policy Uncertainty and Aggregate Fluctuations (October 2013). CEPR Discussion Paper No. DP9694. Available at SSRN: https://ssrn.com/abstract=2343704

Haroon Mumtaz (Contact Author)

University of London - School of Sciences ( email )

London, WC1E 7HX
United Kingdom

Paolo Surico

London Business School - Department of Economics ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom

HOME PAGE: http://sites.google.com/site/paolosurico

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

HOME PAGE: http://sites.google.com/site/paolosurico

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