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Treasury Spreads and Measured Policy Uncertainty

Summary:
Do they matter? Figure 1: Economic Policy Uncertainty, 7 day centered moving average (gray, left scale), 10 year-3 month Treasury spread (blue, right scale), 10 year-2 year spread (red, right scale), both in %. Orange denotes Trump administration. First orange line at election; second at government closure. Source: policyuncertainty.com, FRED, and author’s calculations.Why should we care? The spreads is of interest for well-known reasons. Interestingly, the economic policy uncertainty index (Baker-Bloom-Davis) seems to presage recessions at six month lags (statistically so, in-sample). I show this in the below graph, where both indicators are lagged 6 months. Figure 2: Economic Policy Uncertainty (gray, left scale) lagged 6 months, and 10 year-3 month Treasury spread (blue, right scale),

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Do they matter?

Treasury Spreads and Measured Policy Uncertainty
Figure 1: Economic Policy Uncertainty, 7 day centered moving average (gray, left scale), 10 year-3 month Treasury spread (blue, right scale), 10 year-2 year spread (red, right scale), both in %. Orange denotes Trump administration. First orange line at election; second at government closure. Source: policyuncertainty.com, FRED, and author’s calculations.

Why should we care? The spreads is of interest for well-known reasons. Interestingly, the economic policy uncertainty index (Baker-Bloom-Davis) seems to presage recessions at six month lags (statistically so, in-sample). I show this in the below graph, where both indicators are lagged 6 months.

Treasury Spreads and Measured Policy Uncertainty

Figure 2: Economic Policy Uncertainty (gray, left scale) lagged 6 months, and 10 year-3 month Treasury spread (blue, right scale), in %, lagged 6 months. NBER defined recession dates shaded gray. Orange denotes Trump administration. Source: policyuncertainty.com, FRED, and author’s calculations.

While lagged economic policy uncertainty is statistically significant in-sample, it’s not clear it would be helpful out-of-sample (note that in the 1990-91 recession, elevated uncertainty shows up as a correlate at a less than 6 month lag). Analysis is hampered by the small sample (3 recessions for the period spanned by the Baker-Bloom-Davis index).

Food for thought. Maybe Trump’s policies will give us an increase in the sample size.

Menzie Chinn
He is Professor of Public Affairs and Economics at the University of Wisconsin, Madison

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