EconPapers    
Economics at your fingertips  
 

Has Economic Policy Uncertainty Hampered the Recovery?

Scott Baker (), Nicholas Bloom () and Steven Davis ()

No 2012-003, Working Papers from Becker Friedman Institute for Research In Economics

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 that high levels of policy uncertainty are associated with weaker growth prospects.

Keywords: policy uncertainty index; news-based uncertainty measure; tax-code expirations; forecaster disagreement; slow recovery (search for similar items in EconPapers)
JEL-codes: E60 C43 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations View citations in EconPapers (17) Track citations by RSS feed

Downloads: (external link)
http://econresearch.uchicago.edu/sites/econresearc ... les/BFI_2012-003.pdf (application/pdf)

Related works:
Chapter: Has Economic Policy Uncertainty Hampered the Recovery? (2012) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bfi:wpaper:2012-003

Access Statistics for this paper

More papers in Working Papers from Becker Friedman Institute for Research In Economics Contact information at EDIRC.
Series data maintained by Toni Shears ().

 
Page updated 2017-12-10
Handle: RePEc:bfi:wpaper:2012-003