Sunday, January 17, 2016

Measuring Policy Uncertainty and its Effects

Fascinating work like Baker, Bloom and Davis (2015) has for some time had me interested in defining and measuring policy uncertainty and its effects. 

A plausible hypothesis is that policy uncertainty, like inflation uncertainty, reduces aggregate welfare by throwing sand in the Walrasian gears. An interesting new paper by Erzo Luttmer and Andrew Samwick, "The Welfare Cost of Policy Uncertainty: Evidence from Social Security," drills down to the micro decision-making level and shows how it reduces individual welfare by directly eroding the intended policy benefits. Nice work.