Smith, Y. (2014) “Understanding the Confidence Fairy“, MacroBusiness, 1 Απριλίου.
One strange claim in the economic debate that followed the financial crisis was the impact of uncertainty on the path of investment and subsequently the recovery in economic activity. Taking just one example, it was claimed here that “fiscal policy uncertainty has directly harmed the American economy by increasing the unemployment rate by 0.6%, or the equivalent of 900,000 jobs.”
Often the idea of uncertainty is captured in economic debates by labelling its inverse, a high degree of certainty, ‘confidence’, or when being a little more critical, the ‘confidence fairy’.
It was never particularly clear to me exactly what ‘high’ or ‘low’ uncertainty was supposed to mean, since the future is always uncertain and investment is always risky, and current policy decisions are not set for eternity. In this post I will dig down into the economic theory of real options that forms the basis for claims that uncertainty alone can greatly reduce investment activity. By doing so I hope the reader will develop a considered level of scepticism about such claims.
Σχετικές αναρτήσεις:
- Mody A. (2014) “Europhoria once again- should we view the recent fall in spreads and yields as a sign of confidence or as another overreaction?” Bruegel Blog, 10 Φεβρουαρίου.
- Eurostat (2013) “Sustainable development in the European Union: 2013 monitoring report of the EU sustainable development strategy“, European Union and Eurostat: Luxembourg.
- Krugman, P. (2013) “The Money Trap”, The New York Times, 14 Νοεμβρίου.