Economic Policy Uncertainty on the Rise

What does it mean for economic activity?

Figure 1: Daily US Economic Policy Uncertainty Index (blue), and centered 7 day moving average (bold red). Source: policyuncertainty.com accessed 1/15/2018, and author’s calculations.

Does economic policy uncertainty matter for real activity. In a new CEPII brief, Laurent Ferrara, Stéphane Lhuissier & Fabien Tripier review the evidence in “Uncertainty Fluctuations: Measures, Effects and Macroeconomic
Policy Challenges”.

Their Lesson #3 is particularly interesting.

The effectiveness of economic stabilization
policies depends on the state of uncertainty and should
then be adapted accordingly

Beside the role of public authorities in stabilizing political,
economic and financial uncertainty, the channel of
transmission of macroeconomic policies is likely to be
impaired by uncertainty. Under conditions of high uncertainty,
the effectiveness of fiscal and monetary policies is damaged,
and thus economic actors (households, firms, and investors)
become less inclined to respond to policy impulses. …

Entire brief here.

More on uncertainty, relating to Brexit, here, JIMF-BdF-UCL conference here, at ASSA here.

Negative interest rates

A few years ago, most economic models presumed that interest rates were subject to a lower bound of zero. Why lend a dollar to someone who only promises to pay you back 99 cents, when you could just hold on to the dollar yourself? But we now have several years of experience from Sweden, Denmark, Switzerland, Japan, and the European Central Bank in which the central bank successfully induced negative interest rates in hopes of stimulating a greater level of spending on goods and services. We have enough data now to take a look at how much that seems to have accomplished, and update my earlier discussion of this topic.
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