Fiscal Policy Uncertainty Slowed Recovery, Not the Fed

“Measuring Economic Uncertainty” is a working paper coauthored by three academic economists. They note that:

In recent years, many commentators have made two claims about economic policy uncertainty. First, that it increased after the start of the 2007-2009 recession because of businesses and households uncertainty about future tax, spending, regulatory, health-care and monetary policies. Second, that this increase in policy uncertainty slowed the recovery from the recession by leading businesses and households to postpone investment, hiring and consumption expenditure. We seek to investigate both claims.

They construct a new measure of economic policy uncertainty (EPU) and examine its evolution since 1985. They find evidence of substantial increases in policy uncertainty in the United States and worldwide since 2007, with their EPU index increasing by more than 50%. Here is one of their major conclusions:

Drilling down into our index we find that the post-2008 increases are driven mainly by tax, spending and healthcare policy uncertainty. Perhaps surprisingly we find no evidence of an increase in monetary policy uncertainty after 2008. One interpretation is that since inflation and interest rates have both been low and stable since mid-2008 onwards, monetary policy is not seen by the news media as contributing to economic policy uncertainty.