Policy uncertainty and aggregate fluctuations

Surico, P and Mumtaz, H (2018) Policy uncertainty and aggregate fluctuations. Journal of Applied Econometrics, 33 (3). pp. 319-331. ISSN 0883-7252

Abstract

This paper estimates the impact on the US economy of four types of uncertainty about (i) government spending, (ii) tax changes, (iii) public debt sustainability and (iv) monetary policy. Following a one standard deviation shock, uncertainty about debt sustainability has the largest and most significant impact on real activity, with negative effects on output, consumption and investment after two years around 0.5%, 0.2% and 1.5% respectively. Uncertainty on the other economic policies has also detrimental consequences but these tend to be smaller and short-lived, especially for taxes and monetary policy. About 30% of output fluctuations are explained by policy uncertainty at most frequencies, with the lion's share accounted for by debt sustainability. Our results are based on a new empirical framework that allows the volatility of identified shocks to have a direct impact on the endogenous variables of an otherwise standard structural VAR.

More Details

Item Type: Article
Subject Areas: Economics
Additional Information: This is the peer reviewed version of the following article: Mumtaz H, Surico P (2018). Policy uncertainty and aggregate fluctuations. Journal of Applied Economics, Vol 33 (3), p.319-331, which has been published in final form at https://doi.org/10.1002/jae.2613. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Self-Archiving.
Funder Name: European Research Council
Subjects: E > Economic planning
Date Deposited: 24 Jan 2018 16:19
Last Modified: 14 Sep 2019 17:32
URI: http://lbsresearch.london.edu/id/eprint/910
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