Comovement in Economic Policy Uncertainty

Reader Ed Hanson makes a puzzling assertion regarding trade policy measures announced by Mr. Trump, and the evolution of policy uncertainty as measured by Baker, Bloom and Davis:

As for the uncertainty, I can not make your author’s calculation but I can look at the front page of the policyuncertainty.com site and look at the headline monthly index they present. All the countries, except India, show a similar chart. So I doubt if such uncertainty across the spectrum is caused by a minor thing such as TPP. But I would not be surprised if some of the spike is coming down from the Chinese US trade spiff. Both these countries show very similar recent chart.

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TPP: Maybe Not So Horrible

From The Hill:

President Trump on Thursday instructed top administration officials to explore re-entering the Trans-Pacific Partnership (TPP) — a trade pact he pulled the U.S. out of last year while calling it a “disaster.”

With this whipsaw of trade policy announcements, is it any wonder that economic policy uncertainty is rising? As measured by the Baker, Bloom and Davis index:


Figure 1: Daily EPU index as of April 12 (blue), and 7 day centered moving average (bold red). Source: policyuncertainty.com, and author’s calculations.

A longer term perspective on economic policy uncertainty is shown in this post.

And of course, most of us knew it wasn’t so horrible at all, back when we had a chance to influence the nature of TPP.

Update, 8:15PM Pacific 4/13: Reader Ed Hanson asserts that EPU is rising for most countries. I plot below the monthly indices; I honestly don’t see what he’s claiming.


Figure 2: Monthly EPU indices. Source: policyuncertainty.com.

Are Soybean Tariffs Irrelevant?

I’ve seen the argument that China’s tariffs on soybeans will have no effect because the soybeans will be relabeled so that US soybeans go to Europe, and soybeans that previously went to Europe go to China, evading Chinese tariffs on US soybeans. John Cochrane makes this point. This seems to have surface appeal in a world where transport costs are zero, and there are no set-up costs to establishing new trading links. Still, I sensed that this conclusion must rest on some assumptions, including for instance infinitely elastic supply. I decided to investigate further.

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