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Baker, Bloom and Davis “Measuring Economic Policy Uncertainty”

This study by Baker, Bloom, and Davis examines the relationship between policy-related economic uncertainty and its impact on real output, investment, and employment. The authors develop an index to measure policy uncertainty and find that an increase in uncertainty leads to a decline in GDP, private investment, and employment.

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Baker, Bloom and Davis “Measuring Economic Policy Uncertainty”

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  1. Baker, Bloom and Davis“Measuring Economic Policy Uncertainty” Vaughan / Economics 639 Fall 2015

  2. Overview Many commentators argue uncertainty about taxes, government spending, and other policy matters deepened 2007-09 recession. • To investigate, authors develop new index of policy-related economic uncertainty. • They then examine potential impact of uncertainty (using their measure) on real output, investment, and employment.

  3. Index of Policy Uncertainty Based on an average of three components: • Frequency of references to economic uncertainty and policy in Google news media catalogue • Number of federal tax code provisions set to expire. • Extent of disagreement among economic forecasters over future federal government purchases (fiscal policy) and future CPI (monetary policy).

  4. Recent Trends in Policy Uncertainty

  5. Macroeconomic Impact Increase in policy uncertainty index equal to rise from 2006 to 2011 is followed by: • Peak decline in real GDP of -2.2% after four quarters. • Peak decline of private investment of 13% after three quarters. • Peak decline in aggregate employment of 2.5 million after 8 quarters.

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