By Brai Odion-Esene

WASHINGTON (MNI) – The heightened level of uncertainty brought
about by the Great Recession, and which remains today in regard to
future conditions, is having a greater impact on U.S. economic activity
— and likely made the unemployment rate higher than it would have been
otherwise, according to a research note published by the San Francisco
Federal Reserve Bank Monday.

In the Economic Letter, Sylvain Leduc and Zheng Liu, both research
advisors at the San Francisco Fed, argue that “heightened uncertainty
acts like a decline in aggregate demand because it depresses economic
activity and holds down inflation.”

“The U.S. economy has slowed substantially in recent months,” they
wrote, noting many cite uncertainty about future economic conditions as
an important factor behind the tepid recovery.

From a monetary policy standpoint, the report noted that, “One
possible reason why uncertainty has weighed more heavily on the economy
in the recent recession and recovery is that monetary policy has been
limited by the zero lower bound on nominal interest rates. Because
nominal rates cannot go significantly lower than their current near-zero
level, policy is less able to counteract uncertainty’s negative economic
effects.”

The economists said the model they used estimates that uncertainty
has pushed up the U.S. unemployment rate by between one and two
percentage points since the start of the financial crisis in 2008.

“To put this in perspective, had there been no increase in
uncertainty in the past four years, the unemployment rate would have
been closer to 6% or 7% than to the 8% to 9% actually registered,” they
said.

And perhaps to justify the recent round of aggressive but
unconventional monetary easing measures announced by the Fed, the
report’s authors argued that the central bank does not face a tradeoff
between its maximum employment and inflation mandates should uncertainty
act like a fall in aggregate demand.

“Easier monetary policy would mitigate the decline in output and
restore price stability,” they said.

** MNI Washington Bureau: 202-371-2121 **

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