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Policy Uncertainty is a broad class of economic risk where the future path of government policy is uncertain, raising risk premia and leading businesses and individuals to delay spending and investment until this uncertainty has been resolved. Policy uncertainty may refer to uncertainty about monetary or fiscal policy, the tax or regulatory regime, or uncertainty over electoral outcomes that will influence political leadership.
Policy Uncertainty and the Great Recession
During the Great Recession of the late 2000s and the years following it, many academics, policymakers, and business leaders have asserted that levels of policy uncertainty had risen dramatically and had contributed to the depth of the recession and the weakness of the following recovery.
Much of the policy uncertainty in the United States has revolved around fiscal policy as well as uncertainty over the tax code. This is best exemplified by partisan fights in Congress over the Fiscal Cliff and raising the Debt Ceiling. In addition, important pieces of environmental, energy, healthcare, and financial regulation were disputed in Congress and the wider political arena during these years.
Policy Uncertainty in Europe has been an issue due to uncertainty over the European Sovereign Debt Crisis and its possible outcomes. The future path of government spending, potential bailouts, monetary policy by the European Central Bank have been widely speculated on, making for a highly uncertain business environment.
- Baker, Scott; Bloom, Nick; Davis, Steven (2011). "Measuring Policy Uncertainty?". Stanford Mimeo.
- Pastor, Lubos; Veronesi, Pietro (2011). "Uncertainty about Government Policy and Stock Prices".
- "Fear of Year-End Fiscal Stalemate May Be Having Effect Now". New York Times. 2012.
- "Want Growth? Try Stable Tax Policy". Wall Street Journal. 2012.
- "Dithering in the Dark". The Economist. 2012.