Policy Uncertainty and Stock Markets (Blog Post)

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Author	Taylor Jacobe
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© edegan.com, 2016

An idea proposed by Russell Green.

Outline

1. Hook & summary intro
   1. https://www.ft.com/content/9d49b092-f859-11e6-9516-2d969e0d3b65
2. It feels like policy uncertainty has gone through the roof lately
   1. huge political transition with very vague policy specifics, eg very different trade, environmental, immigration & tax policy
   2. chaotic white house, eg tweets, possible violations of law, pushing the boundaries of constitutionality, possible links to Russia, etc
      1. some tweets directed at firms, ie punishment w/o due process
3. Uncertainty hugely important for investment, entrepreneurship
   1. I would start off linking to this recent QJE paper, done by the authors of the index discussed below.
   2. Similar set of authors finding general uncertainty is bad for investment
   3. environmental policy change can kill innovation
   4. The big increase in China's economy following accession to the WTO was not about lower tariffs, but about lower uncertainty of future tariffs. (Pierce and Schott (2016) and Handley and Limao (2016).
4. Yet stock mkt doing fine
   1. [obvious evidence]
   2. emerging markets may show the opposite phenomenon
5. puzzle!! How do we reconcile?
6. objective index of policy uncertainty doesn't measure it as different from Obama 1st term
   1. explain index [in email from Green]
   2. the index may be mostly collecting evidence that economic uncertainty is associated with policy
   3. my point is about policy uncertainty that hurts the economy, which is a slightly different story
      1. that might help explain the disconnect
      2. interpret findings
7. does it mean there isn't as much policy uncertainty as it seems?
   1. 1. [You have the freedom to come up with your own explanations here]
8. Other explanations you may want to include
   1. tax & reg cuts?
   2. infra spending
   3. conventional wisdom hinges on short-term explanations, but fiscally unsustainable or bad policy can have bad long-term implications
9. [return to hook & summary conclusion]

Google Doc

https://docs.google.com/a/rice.edu/document/d/1DPwCGbOL-6jUeJttT7Qbzfk7gjxSJlY5SI8y7-i0mI0/edit?usp=sharing

Data doc

https://docs.google.com/spreadsheets/d/1FR6VKH1xPCe5RAdXH5gS-Qbqhat_p-ihrfjeVgc8MjU/edit#gid=1548167170