Policy Uncertainty and Its Economic Implications

December 6–7, 2012

(All day)

Multiple Locations
Nicholas Bloom, Stanford University
Steven J. Davis, University of Chicago Booth School of Business and the Hoover Institution

The Policy Uncertainty and its Economic Implications conference called economists to Chicago to tackle the subject of uncertainty— a key issue for understanding today's economy and what causes, deepens, and extends recessions.  The aim was to exchange perspectives, new ideas and early-stage research leading to knowledge that will guide policy makers and market practitioners. .

Although it is generally agreed that uncertainty is linked to market volatility and dampens growth, it remains challenging to define. Conference presenters and audience participants dedicated much of the conference to discussing how to measure uncertainty shocks as a means of clarifying its definition, cause, and impact.

The conference began with a key paper by Scott Baker, Nicholas Bloom, and Steven Davis that details an index they devised to measure economic and policy-related uncertainty. Baker showed how the coauthors used cutting-edge automated text analysis techniques to count key words relevant to uncertainty in the media. Media references to uncertainty are a valuable indicator but alone, they are not a sufficient measure. To create their index, the authors combined this news analysis with data quantifying tax code changes, disagreement among economic forecasters, and information from equity option markets.

They relate the level of uncertainty to aggregate economic activity measures such as gross domestic product, private investment, and unemployment, and find that spikes in uncertainty foreshadows large and persistent declines in all three. Their work provides evidence that uncertainty was a key factor in the 2007–2009 recession.

The paper was cited frequently in other work presented throughout the conference. Others also put forth work correlating uncertainty to company-specific activity such as hiring and research spending or to cash flows, discount rates, and equity risk premia.

In several of the papers presented, researchers tried to quantify it by devising an index or deriving it from a theoretical or mathematical model. One paper on uncertainty shocks tackled the definition question by studying the changing degree of confidence forecasters have in their model's forecast.”

“Many of the approaches to uncertainty presented at this conference can and should be applied to urgent policy challenges,” said Institute research director Lars Peter Hansen. “We have to work toward clarity regarding the sources and impact of uncertainty,” he concluded.


December 6: Math-Stat Building
December 7: Gleacher Center


The institute gratefully acknowledges generous support for this event from the CME Group Foundation and Donald R. Wilson Jr., AB’88.

December 6, 2012 (All day) December 7, 2012 (All day)