The presence of a negative relationship between uncertainty and economic activity seems intuitive. Presumably, as Goldman explains, more uncertainty reduces the incentive for firms and households to engage in economic transactions that are costly to reverse (e.g., investments, hiring, purchases of durable goods). To the extent that this is the case, one would expect the resulting dampening effect on aggregate demand and economic activity to ebb as the fog of uncertainty clears.
But the consequences of an uncertainty shock may prove more malign than typically assumed.
To paraphrase former Fed Governor Jeremy C. Stein, uncertainty “gets in all the cracks”: it distorts economic decisions and behavior through numerous channels, in a manner that policymakers cannot easily restrain. Indeed, recent academic research argues that, when such dynamics become self-fulfilling and/or self-perpetuating, spikes in uncertainty (as witnessed in 2008-09) can lead to financial turmoil, as well as to a pronounced slowdown in activity.
And so, judging by the economic uncertainties of the following nations, there is one country that stands out…
The “sanctioned” and “increasingly alone” Russians see near record low levels of economic uncertainty… which may explain why their currrency, bonds, and stock market are all doing so well in recent months.
Source: Goldman Sachs
via http://ift.tt/291BRTP Tyler Durden