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If there is one thing certain about U.S. policy in turbulent times, it is uncertainty. From health-care and tax reform to trade and the environment, the economic consequences of stalled policy making have significant economic implications.
According to research by Huseyin Gulen, a professor of finance at Purdue's Krannert School of Management, the impact on corporate investment is particularly negative, both from a short- and long-term perspective. Gulen and his co-author, Mihai Ion of the University of Arizona, detail their findings in "Policy Uncertainty and Corporate Investment," which was published as an Editor's Choice lead article in The Review of Financial Studies. The researchers used the Economic Policy Uncertainty Index, which measures the occurrence in newspaper articles of words related to economic uncertainty and gauges the number of expiring tax laws and the spread among economic forecasts, to examine uncertainty following 2008/09 financial crisis.
Their findings document a strong negative relationship between capital investment and the aggregate level of uncertainty associated with future policy and regulatory outcomes.