Federal Reserve Chairman Ben Bernanke told Congress last week he didn’t know how strong an impact uncertainty had on the economy. Treasury Secretary Timothy Geithner mentioned it on the Sunday morning talk shows.
The challenge is that policy makers may not be able to do much about removing uncertainty. Economists worry that this unique recession and the squabbling in Washington may be making the future less clear than during similar stages of past recoveries.
Indeed, exactly what role uncertainty plays in business decisions is hard to gauge. The long-held notion is that executives take a “wait-and-see” stance in the face of uncertainty. Former Fed chief Alan Greenspan once said that the inability to understand external events “almost invariably induces fear and, hence, disengagement from an activity, whether it be entering a dark room or taking positions in markets.”
That assumption may be wrong, according to research done by Ruediger Bachmann of the University of Michigan, Eric Sims of the University of Notre Dame, and Steffen Elstner of the University of Munich. Their research, published on the National Bureau of Economic Research website, found no evidence that changes in uncertainty cause a wait-and-see effect, defined as a large decline in economic activity when uncertainty hits followed later by fast rebounds.
This research was on economic, not political, uncertainty.