Regime Uncertainty

A lot of important economic concepts have filtered into journalist accounts and even everyday conversation about our current finanacial crsis.  Moral hazard, liquidity, credit contagion, deflation, etc. have all been used in various accounts that often demonstrate the old adage that "a little bit of knowledge is a dangerous thing" as much as the usefulness of these economic concepts to aid understanding.

To my mind, one of the most important economic concepts to be developed in the past decade is Bob Higgs's idea of "regime uncertainty" and the application to which he has put that concept to use to explain the deepth and length of the Great Depression.  Given the earlier application, the relevance of the concept of "regime uncertainty" to our current situation should be evident.

Comments

[Grant]

Peter,

I think this problem is vastly understated! I have talked to execs in the banking industry who have told me that new entrants into the market are essentially waiting to see what the government will do. The supply of credit drops, yet it can't be filled until the government plays its hand. The little guy(s) who might take the place of fallen giants never get a face on the news, and can't afford to lobby anyone. The wealth that society looses from uncertain policies must be dispersed and nigh-impossible to estimate.

I myself am considering putting some plans on hold or scrapping them altogether, due to possible regulatory changes.

[Ian Dunois]

The end paragraph, at least for me, makes the point extremely clear. So how do we get this concept to be discussed more widely or will it remain purely academic?

[Roger Koppl]

May I point out that regime uncertainty and Big Players are not really separate topics? Higgs notes that the issue has been neglected in part because of "the availability of standard macroeconomic models whose variables do not include the degree of regime uncertainty and, even if one wanted to incorporate it into an existing model, the absence of any conventional quantitative index of such uncertainty." While I don't have any such index, my co-authors and I done econometric studies on the topic. In this sense we have applied relatively mainstream tools to a problem the mainstream has largely neglected.