The impact of uncertainty—in particular policy uncertainty—is a hot topic of debate in the press and the blogosphere. So the Dallas Fed decided to hold a conference last week to explore the issue. Nick Bloom of Stanford, Tom Fomby of SMU, and Evan Koenig of the Dallas Fed organized it. Many economists who have been doing serious academic research on the topic came. They presented papers, answered questions and listened to criticism. At lunch, Richard Fisher and I gave talks and discussed policy uncertainty with Nick Bloom before a larger audience from the Dallas community which was open to and covered by the press. Richard Fisher summarized the issue succinctly in his informative remarks: “Uncertainty matters. A lot.” I added that the recent increase in policy uncertainty was like a climate change rather than a few isolated storms here than there due, say, to the shutdown and debt limit hikes.
It was a terrific conference with a great deal of value added by the academic papers. Larry Christiano, for example, demonstrated that there was a surprisingly strong correlation between the business cycle and cross-sectional industry variability (a measure of “risk shocks” not necessarily related to policy), and showed how this correlation can be explained with a particular dynamic stochastic model with a financial sector. Steve Davis pointed out that his data on policy uncertainty (produced along with Nick Bloom and Scott Baker) provided evidence of a recent policy climate change—not simply spikes around the time of debt limit debates. Laura Veldkamp and Anna Orlik showed that model uncertainty is a big source of uncertainty shocks and that the non-normal distribution of shocks explains unusual patterns of economic forecasts.
More generally, as Larry and Steve pointed out, these and other findings in the papers will stimulate much more research and many more papers in the months and years ahead. What started as a hot policy debate topic has turned into a hot research topic.
Here is a list of all the academic papers presented Risk News Shocks and the Business Cycle Gabor Pinter, Konstantinos Theodoridis, Tony Yates; Risk Shocks, Lawrence Christiano, Roberto Motto, Massimo Rostagno; Measuring Economic Policy Uncertainty Scott Baker, Nicholas Bloom, Steven Davis; Surprisce and Uncertainty Indexes: Real-Time Aggregation of Real-Activity Macro Surprises Chiara Scotti; Understanding Uncertainty Shocks and the Role of the Black Swan Anna Orlik Laura Veldkamp; Reviewing the Leverage Cycle Ana Fostel John Geanakoplos; Macroeconomic Volatility and External Imbalances Alessandra Fogli, Fabrizio Perri; Fiscal Volatility Shocks and Economic Activity Jesús Fernández-Villaverde, Pablo Guerrón-Quintana, Keith Kuester, Juan Rubio-Ramírez; Slow to Hire, Quick to Fire: Employment Dynamics with Ambiguous Private Signals Cosmin Ilut, Matthias Kehrig, Martin Schneider; Volatility and Pass-Through David Berger, Joseph Vavra. (Links soon become out of date, so check with authors).