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Policy Uncertainty and Economic Activity

Paper Session

Saturday, Jan. 4, 2025 8:00 AM - 10:00 AM (PST)

Hilton San Francisco Union Square, Golden Gate 4
Hosted By: American Economic Association
  • Chair: Nicholas Bloom, Stanford University

The World Uncertainty Index

Hites Ahir
,
International Monetary Fund
Nicholas Bloom
,
Stanford University
Davide Furceri
,
International Monetary Fund

Abstract

We construct the World Uncertainty Index (WUI) for an unbalanced panel of 143 individual
countries on a quarterly basis from 1952. This is the frequency of the word “uncertainty” in the
quarterly Economist Intelligence Unit country reports. Globally, the Index spikes around major
events like the Gulf War, the Euro debt crisis, the Brexit vote and the COVID pandemic. The
level of uncertainty is higher in developing countries but is more synchronized across advanced
economies with their tighter trade and financial linkages. In a panel vector autoregressive setting
we find that innovations in the WUI foreshadow significant declines in output. This effect is
larger and more persistent in countries with lower institutional quality, and in sectors with greater
financial constraints.

Regional Trade Policy Uncertainty

Celine Poilly
,
Aix-Marseille School of Economics
Fabien Tripier
,
Paris Dauphine University

Abstract

Higher uncertainty about trade policy has recessionary effects in U.S. states. First, this paper builds a novel empirical measure of regional trade policy uncertainty, based on the volatility of national import tariffs at the sectoral level and the sectoral composition of imports in U.S. states. We show that a state which is more exposed to an unanticipated increase in tariff volatility suffers from a larger drop in real output and employment, relative to the average U.S. state. We then build a regional open-economy model and we argue that the transmission channels of uncertainty shocks, in particular the precautionary-pricing channel, are magnified in regions that feature the highest import share and a strongest export intensity. Furthermore, we show that an expansionary monetary policy may amplify the regional divergence since it worsens the recession in the most-exposed region to trade policy uncertainty.

Tariff Rate Uncertainty and the Structure of Supply Chains

Sebastian Heise
,
Federal Reserve Bank of New York
Justin Pierce
,
Federal Reserve Board
Georg Schaur
,
University of Tennessee
Peter K. Schott
,
Yale University

Abstract

We show that reducing the probability of a trade war promotes long-term importer-exporter relationships that ensure provision of high-quality inputs via incentive premia. Empirically, we introduce a method for distinguishing between these Japanese versus spot-market (i.e., American) relationships in customs data, show that their use varies intuitively across trading partners and products, and find that Japanese importing from China increases after a reduction in the possibility of a trade war. Extending the standard general equilibrium trade model to encompass potential trade wars and relational contracts, we estimate that eliminating Japanese procurement reduces welfare about a third as much as moving to autarky.

The Macroeconomic Effects of Fiscal Policy Uncertainty: Evidence from a New Cross-Country Database

Gee Hee Hong
,
International Monetary Fund
Shikun (Barry) Ke
,
Yale University
Anh Dinh Minh Nguyen
,
International Monetary Fund

Abstract

There is a popular discourse suggesting fiscal policy is a major source of economic uncertainty. Except for the United States, however, few attempts have been made to quantify fiscal policy uncertainty and its economic implications. In this paper, we examine the impact of fiscal policy uncertainty on industrial production and spreads by constructing a novel cross-country database of news-based fiscal policy uncertainty (FPU) index for over 180 countries. Global fiscal policy uncertainty (FPU), defined as a weighted average of country-level FPU, surges during recessions and major fiscal-related stress events. Global FPU has a significant impact on production activities and spreads for both advanced and emerging economies. We also find that, even after controlling for US monetary policy shocks, global fiscal policy uncertainty induces co-movements in the global financial cycle.
JEL Classifications
  • E0 - General