We develop a new index of economic policy uncertainty (EPU) based on newspaper coverage frequency. Several types of evidence-including human readings of 12,000 newspaper articles-indicate that our index proxies for movements in policy-related economic uncertainty. Our U.S. index spikes near tight presidential elections, Gulf Wars I and II, the 9/11 attacks, the failure of Lehman Brothers, the 2011 debt ceiling dispute, and other major battles over fiscal policy. Using firm-level data, we find that policy uncertainty is associated with greater stock price volatility and reduced investment and employment in policy-sensitive sectors like defense, health care, finance, and infrastructure construction. At the macro level, innovations in policy uncertainty foreshadow declines in investment, output, and employment in the United States and, in a panel vector autoregressive setting, for 12 major economies. Extending our U.S. index back to 1900, EPU rose dramatically in the 1930s (from late 1931) and has drifted upward since the 1960s.
The great moderation lulled macroeconomists and policymakers alike in the belief that we knew how to conduct macroeconomic policy. The crisis clearly forces us to question that assessment. In this paper, we review the main elements of the precrisis consensus, identify where we were wrong and what tenets of the precrisis framework still hold, and take a tentative first pass at the contours of a new macroeconomic policy framework.
Using the news-based measure of Baker et al. [Baker SR, Bloom N, Davis SJ (2013) Measuring economic policy uncertainty. Working paper, Stanford University, Stanford, CA] to capture economic policy uncertainty (EPU) in the United States, we find that EPU positively forecasts log excess market returns. An increase of one standard deviation in EPU is associated with a 1.5% increase in forecasted three-month abnormal returns (6.1% annualized). Furthermore, innovations in EPU earn a significant negative risk premium in the Fama–French 25 size–momentum portfolios. Among the Fama–French 25 portfolios formed on size and momentum returns, the portfolio with the greatest EPU beta underperforms the portfolio with the lowest EPU beta by 5.53% per annum, controlling for exposure to the Carhart four factors as well as implied and realized volatility. These findings suggest that EPU is an economically important risk factor for equities. This paper was accepted by Wei Jiang, finance.
We develop a toolbox that characterizes the welfare-maximizing cooperative Ramsey policies under full commitment and open-loop Nash games between policymakers. We adopt the timeless perspective. Two examples for the use of our toolbox offer novel results. The first example revisits the case of monetary policy coordination in a two-country model to highlight sensitivity to the choice of policy instruments. For the second example, a central bank and a macroprudential policymaker are assigned distinct objectives in a model with financial frictions. Lack of cooperation can lead to large welfare losses even if technology shocks are the only source of fluctuations.
Proprotein convertase subtilisin/kexin type 9 (PCSK9) inhibitors substantially reduce low-density lipoprotein cholesterol, but it is presently unclear whether they also reduce mortality. The list prices of PCSK9 inhibitors in the United States (>$14,500 per year) are >100× higher than generic statins, and only a small fraction of their higher cost is likely to be recovered by prevention of cardiovascular events. The projected cost effectiveness of PCSK9 inhibitors does not meet generally accepted benchmarks for good value in the United States, but their value would be improved by substantial price reductions. For individual patients, the high out-of-pocket costs of PCSK9 inhibitors may impede access and reduce long-term adherence. The budgetary impact of PCSK9 inhibitors would be very large if all potentially eligible patients were treated, which poses dilemmas for policymakers, payers, and society.
This paper discusses theoretical and empirical research on how two constitutional features, electoral rules and forms of government, affect economic policymaking. The authors begin by outlining some key objectives of democratic political constitutions and by pointing out the inertia and systematic selection that characterize real-world constitutions. They then introduce the main concepts used to categorize work on constitutions: different kinds of electoral rules and forms of government. They then discuss how these elements of constitutions affect the accountability of government and the size of political rents and corruption, as well as the representativeness of government and a variety of fiscal policy choices.
Oil price fluctuations have influential role in global economic policies for developed as well as emerging countries. I investigate the role of international oil prices disintegrated into structural (i) oil supply shock, (ii) aggregate demand shock and (iii) oil market specific demand shocks, based on the work of Kilian (2009) using structural VAR framework on economic policies uncertainty of sampled markets. Economic policy uncertainty, due to its non-linear behavior is modeled in a regime switching framework with disintegrated structural oil shocks. Our results highlight that Indian, Spain and Japanese economic policy uncertainty responds to the global oil price shocks, however aggregate demand shocks fail to induce any change. Oil specific demand shocks are significant only for China and India in high volatility state.