policy

Policy and uncertainty

PUI koerant

This week I participated in the launch of the NWU Policy Uncertainty Index. The index number and report are the results of a small research project I have been working on with Prof Raymond Parsons. The press release is here on the School’s blog and we received a bit of media coverage as well in Beeld and Business Day.

One of the interesting questions we have been getting is how to distinguish between the impact of policy uncertainty and bad policy.

Certain

Uncertain

Good policy  ? ?
Bad policy  ?  ?

Our argument about uncertainty is the standard one: uncertainty is bad for planning, it raises the option value of waiting, it creates the possibility of fooling solutions etc. So, whether a policy is “good” or “bad”, uncertainty about it is always bad. It means that our index will always improve when there is greater certainty about good as well as bad policies – the key is that at least consumers and investors can plan and hedge.

Whether policies are good or bad depends very much on your point of view. I think that building Russian nuclear power stations is bad energy policy and the uncertainty about those plans makes for the worst possible outcome. The same can be said for the 50-50 ownership land reform proposals. It is more complicated when you think about last week’s monetary policy decision. Most Economists were certain that the SARB was going to increase rates but was that good or bad policy under the circumstances? The textbooks say that a central bank with an inflation target needs to show that they are committed to the target and build credibility, especially when it is painful to do so. Markets and ratings agencies are out there, reading the signals… But in this case the good monetary policy signal complicates matters for fiscal policy. The repo rate increase will dampen growth prospects further, lower the tax take and worsen the fiscal aggregates expressed as a percentage of GDP. And then the markets and rating agencies are worried all over again.

Does it help that we were certain about it? I would like to hear some thoughts.