Crises of confidence turn booms into busts. Bloated household balance sheets and high debt offer the right ingredients for a confidence-driven housing bust. This column develops an analytic framework that accommodates the potential role of confidence fluctuations as a source of uncertainty in the economy. Current debt levels are shown to determine the exposure to crises of confidence. The results point to a clear role for macroprudential policy in the prevention of such crises.
Thomas Hintermaier, Winfried Koeniger, 09 January 2016
Alessandra Bonfiglioli, Gino Gancia, 19 December 2015
The Great Recession highlighted the prominent role that economic uncertainty plays in hindering investment and growth. This column provides new evidence that economic uncertainty can actually play a positive role by promoting the implementation of structural reforms with long-run benefits. The effect appears to be strongest for countries with poorly informed voters. These findings suggest that times of uncertainty may present an opportunity to implement reforms that would otherwise not be passed.
Scott Ross Baker, Nicholas Bloom, Steven J. Davis, 15 December 2015
The recent influx of refugees to Europe has stoked security fears and created anxiety about the social and economic consequences. This column provides new quantitative indicators for the intensity of migration-related fears and policy uncertainty, based on newspaper articles. The indices are presented for the US, UK, France, and Germany, and extend back to 1995. They show that recent levels of concern and uncertainty in European countries about migration are unprecedented.
Aqib Aslam, Samya Beidas-Strom, Daniel Leigh, Seok Gil Park, Hui Tong, 18 April 2015
Business investment in advanced economies contracted sharply during the global crisis and has recovered little since. This column argues that the main factor holding back investment is overall economomic weakness. In some countries other contributing factors include financial constraints and policy uncertainty. Fixing the investment dearth will require fixing the general weakness in economic activity.
Jason Furman, Ron Shadbegian, Jim Stock, 25 February 2015
The cost of delaying climate action has been studied extensively. This column discusses new findings based on a meta-analysis of published model runs. A one-decade delay in addressing climate change would lead to about a 40% increase in the net present value cost of addressing climate change. If anything, the methodology used in this analysis could understate the cost of delay. Uncertainty and the possibility of tipping points provide a motivation for more action as a form of insurance against worse outcomes.
Arnaud Chevalier, Olivier Marie, 08 November 2014
Children born in crises face different initial conditions. Data on children born in East Germany just after the Berlin Wall came down confirms that this corresponds to worse adult outcomes. ‘Children of the Wall’ have 40% higher arrest rates, are 33% more likely to have repeated a grade by age 12, and are 9% more likely to have been put into a lower educational track. This column argues that these negative outcomes can be explained by the lower average parenting skills of those who decided to have children during a period of high economic uncertainty.
David Miles, 22 October 2014
Many central banks embrace forward guidance by announcing expected interest rate paths. But how likely it is that actual rates will be close to expected ones? This column argues that quantifying such uncertainty poses great difficulties. Precise probability statements in a world of uncertainty (not just risk) can be misleading. It might be better to rely on qualitative guidance such as: “Interest rate rises will probably be gradual and likely to be to a level below the old normal”.
Charles F Manski, 01 October 2014
Clinical practice guidelines recommend treating all patients with similar attributes the same way. This column argues that, under conditions of uncertainty or ambiguity, this may be bad advice. Treating similar patients differently provides two benefits. The first is diversification – assigning similar patients to different treatments limits the consequences of choosing an inappropriate treatment. The second benefit is that randomly assigning treatments helps clinicians learn which ones are most effective.
Marco Buti, Philipp Mohl, 04 June 2014
Investment in the Eurozone is forecast to remain below trend until 2015, with a particularly large shortfall in the periphery. Low investment reduces aggregate demand, thus lowering short-term growth, and it also hampers medium-term growth through its effect on the capital stock. This column highlights three causes of low Eurozone investment – reduced public investment, financial fragmentation, and heightened uncertainty – and proposes a series of remedies.
Kyle Handley, Nuno Limão, 23 November 2013
The impact of policy uncertainty on economic activity is potentially important, but controversial because it is hard to identify and quantify. Recent research provides a framework to identify the impacts of policy uncertainty on firm decisions, and finds it has strong effects in the context of international trade. China’s WTO accession secured its most-favoured nation status in the US, and the evidence shows this reduction in uncertainty can explain a significant fraction of its export boom to the US.
Daniel Sgroi, 11 November 2013
In the upcoming UK Research Excellence Framework, a small panel of academics are tasked with rating thousands of academic submissions, which will result in university departments being ranked and public money being distributed. Given the enormity of the task and the scarcity of the resources devoted to it, this article discusses a straightforward procedure that might help, based on exactly the Bayesian methods that academic economists study and teach when considering the problem of decision-making under uncertainty.
Masayuki Morikawa, 02 November 2013
Reduced policy uncertainty can contribute to a country’s economic growth. This column highlights the negative influence of policy uncertainty and political instability on the growth of Japan. A survey shows that international trade and tax polices pose the greatest uncertainty on Japanese companies. The column concludes with a discussion of the mechanism via which uncertainty affects corporate behavior.
Knut Are Aastveit, Gisle James Natvik, Sergio Sola, 19 October 2013
Many analysts blame uncertainty for at least part of advance nations’ poor economic performance since the crisis. This column discusses new research showing that the economic impact of monetary policy is dampened when uncertainty is high. This means that high uncertainty forces monetary policymakers into a trade-off between acting decisively and acting correctly as policy must be more aggressive than otherwise in order to stabilise economic activity. The finding is particularly stark when uncertainty measures from financial markets are utilised.
Geoffrey Heal, Antony Millner, 13 June 2013
Uncertainty is intrinsic in climate-change economics. This column argues that it’s here to stay. There will be no accurate predictive tool for predicting economic growth, the emergence of clean-energy technology, or economic vulnerability in light of climate change in the near future. But this is not an excuse not to think about climate economics. Research and policy would do well to be more explicit about what we don’t know. We should avoid subjective guesses, and focus more on credible forecasts from empirically sound, if uncertain, models.
Scott Baker, Nicholas Bloom, 07 February 2012
Reading the business press, one gets the impression that the world of policy is in a very uncertain state around the world. This column presents an up-to-date index of policy uncertainty and suggests that the calming of policy uncertainty may have aided recent economic prospects in the US. Unfortunately, policy uncertainty still appears extremely high in Europe with the Eurozone crisis.
Ashoka Mody, Antu Panini Murshid, 27 November 2011
Recent commentary has suggested that capital inflows – long considered a positive for growth – may actually be doing more harm than good. This column presents new evidence reinforcing the conventional interpretation. It finds that volatility is the determining factor. With volatility below a threshold, an inflow of foreign capital promotes growth. But during periods of volatile growth, the effect is opposite.
Charles F Manski, 22 November 2011
Policymakers and the media often rely on official estimates. But with policies that are so complex and often untested, these estimates are at best rough guesses – so why not be honest about it? This column calls for confidence intervals to be used in future policy debates.
Nicholas Bloom, Scott Baker, Steven J. Davis, 22 October 2011
Policymakers’ choices dominate headlines in the global crisis. This column distinguishes between economic uncertainty and economic policy uncertainty, constructs an index to measure policy-related uncertainty, and argues that improving policy uncertainty would create millions of US jobs.
Barry Eichengreen, 17 June 2010
Financial crises feed on uncertainty. This essay warns that the longer the Eurozone crisis is allowed to linger, the greater will be the damage. But Europe can take concrete actions to bring it to an end. It should make bank stress tests public, provide more clarity on its special purpose vehicle, move forward with restructuring Greece’s debt, and support growth through quantitative easing.
Carlo Favero, 18 November 2009
Today’s global crisis has been compared to the Great Depression in terms of world output, trade, and stock market value. To extend the comparison, this column proposes a new, historically comparable measure of economic uncertainty. The evolution of uncertainty in this crisis has been much less dramatic than in the 1930s.