Some qualitative points on the influence of uncertainty

In this report I elaborate a bit more formally – although still qualitatively – on my sense of the interaction between uncertainty shocks and the dynamic adjustments of business fixed investment flows.

The two main take-aways are as follows.  First, this issue is much more complicated than the popular simple intuition might suggests. The source of confusion here, if I have it right, is quite akin to how consensus often stumbles over the inventory cycle, which stock-flow distinctions also play an important role.  One practical implication is that we cannot rely exclusively on our priors, although I am willing to allow them to guide me here to some extent.  We also need to watch the data.

Second, until recently I was happy to argue that the consensus had set too high a bar on what might be considered relief on the trade policy side.  Given the decent odds that capital spending had undershot, mere truce and a morphing of the uncertainty from acute to chronic might actually be sufficient to lift the gloom around this issue. Recently, however, the consensus has become less worried about this issue, either because they have adopted a sense of the economics that is closer to my own or because they have simply grown tired of overstating the likely scale of this negative.  So, at this point, a report such as the one included here might be taken more as a tombstone.  But I expect it to have a decent shelf-life as this issue of ebbing, flowing and morphing uncertainty seems likely to arise again in the future.  And now I have something to link to.

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