Estimating Policy Accommodation in Real-time

Fiscal and Monetary Policy Looseness model estimate

Fiscal and Monetary Policy Accommodation model estimate

While not the only driver of economics and asset returns, policy-making has a great deal of influence over growth and prices.  In order to estimate its effects, we generalise both monetary and fiscal policy to a percentage which represents how loose or tight policy is at a given point.

We do this by regressing coincident macro variables against policy outcomes, and subtracting the realised policy outcomes from the model.  The residual leaves us with the relative tightness of policy which contributed to the growth outcomes for that time period.

A neutral (0%) policy stance does not represent zero growth, but sample trend growth, +2.5%.  Ergo, slightly negative (tight) values do not necessarily indicate a negative growth stance.

The reasons for recession and growth extend far out the generalisation of policy relative tightness.  Policy-making really just shapes what trends deliver at the margin.

The chief observation is that, relative to the economic variables, fiscal policy actually has been tighter under the Obama administration than under George W Bush.

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One Response to Estimating Policy Accommodation in Real-time

  1. Benign Brodwicz says:

    Similarly, the deficit has dropped at a faster percentage rate under Obama than in many moons. Georgy Porgy Budget Buster liked his fiscal policy loooose….

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