The Impact of Macroeconomic Uncertainty

Yu-Ting Chiang: In this newest podcast episode, I discuss why people’s tendency to learn more information about the economy during crisis and downturns can actually lead to greater uncertainty.

Shera Dalin: Welcome to the St. Louis Fed’s Timely Topics Podcast. I’m Shera Dalin and today we’re talking to Yu-Ting Chiang about his research on macroeconomic uncertainty. Welcome to the podcast, Yu-Ting.

Chiang: Thanks for having me.

Dalin: So glad you could join us today. So, you’ve done quite a bit of research on a really interesting topic that I think a lot of us don’t put any real thought into. We just live our lives. And your topic is macroeconomic uncertainty. So, you also talk about people paying attention to economic conditions. So, what do you mean by attention?

Chiang: So, like, what I mean by attention is that people can spend time and effort into acquiring more information about the economy. Think about like they read news or like listen to our podcasts.

Dalin: Exactly. We hope they’re listening to our podcast. So, when people’s attention to economic events are affected by conditions, how does that play out?

Chiang: So, we do know like, yeah, people’s attention to macroeconomic events depend a lot on how the economy is going. So, usually people pay more attention to macroeconomic events during economic downturns, like crisis. And then—and there’s a good reason for that because the reason people pay more attention is that they want to avoid making mistakes. And during economic crisis, or downturns, making mistakes are more costly. So, people pay more attention to avoid making mistakes during this time.

Dalin: Sure. So, what happens when people are paying more attention? Does it change their behavior?

Chiang: So, when people pay more attention the things they learn from the news changed how they think about the economy and then change how they react to this news. For example, firms may decide how many people to keep on their payrolls or how soon they decide to—whether to buy a new house or not depending on whatever they learned about the economy.

Dalin: It also affects their consumption too, right?

Chiang: Yeah. Yeah. Like that’s all investment and consumption. And that’s all like responses. They, both investment and consumption, are things that they will decide on based on what they think about the economy.

Dalin: Right. So, they may decide that, you know, because there’s a recession that’s either threatened or is happening, it’s not a good time to invest in the stock market or they may actually—they actually will cut back on basic purchases like food or gasoline, things like that, right?

Chiang: They might.

Dalin: How are those decisions related to the macroeconomic economy? What happens in the larger economy when people are reacting to the news?

Chiang: When everyone is paying attention to the same event at the same time, that generates larger response in aggregate. But everyone is reacting to this news but like from slightly different observations and slightly perceptions about like what’s going on in the economy. That means everyone is reacting slightly in a different way, in a slightly different way. When that happens, each of them may face higher uncertainty about what’s going on in the economy because they know they are reacting and they also know other people are reacting as well but they don’t know exactly how other people are reacting. So, when everyone is reacting and don’t know how each other reacts, each of them can face more uncertainty about what’s going on in the economy.

Dalin: Logic would say that when—for individuals they’re probably not as concerned with what their neighbors are doing and how they’re reacting to a recession. But I’m wondering, when you’ve got a business and they’re thinking about how their competitors are reacting, do you see effects in that, more in that realm?

Chiang: You can think like business, they usually have more incentive to pay attention. But that also means they have more incentive to pay even more attention when things are going not doing well. And consumer on the other hand, usually they don’t care but during crisis, maybe they start to care a little bit more. So, how much do they care compared to how usually they care, you know, it’s not very obvious like who will pay more attention in comparison to, you know, more time.

Dalin: That makes sense. That makes sense. So, what’s the impact of uncertainty on households, businesses, and policy makers?

Chiang: So, we know that when households or businesses face more uncertainty, they usually postpone their purchases or investment and that have a large impact on the economy. Also, like when things are volatile, it’s hard for the policy maker to design their policy or responses to new events. And these are like well understood. What’s like less understood was why do people may face more uncertainty in the first place during these crisis. My research give one explanation as to why this—or what’s the origin of this uncertainty in the first place.

Dalin: Did you have an explanation for it? What did you find in your research? What’s the explanation?

Chiang: Because people been paying more attention, that generates more uncertainty.

Dalin: Got it. Okay. The more attention they pay, that breeds more uncertainty and then it just—it’s a cycle that repeats.

Chiang: Yeah. So, it’s—yeah. So, you can think that people aren’t paying more—I guess like there are two important component. One is that people are paying attention and the other is that like the information they get are slightly different from each other.

Dalin: So, does perception have an impact on how people are reacting, and businesses? So, for instance, if people perceive that there’s a recession coming or that a recession has already started but it’s going to be very deep, does that also have an increased factor on the amount of uncertainty that we see in their decisions?

Chiang: It could be because when people perceive that the economy is going to go very bad, they may pay more attention. And when everyone’s paying more attention, they react more and then that generates like more uncertainty for each other, how are they going to react.

Dalin: If you had to boil it down to just a couple of bullet points, what would you want people to remember about your research?

Chiang: I would say people paying more attention can actually generate more economic uncertainty.

Dalin: Well, that’s very interesting research, Yu-Ting. And we appreciate you coming in today so much and sharing that with us.

Chiang: Thanks. Thanks for having me.

Dalin: Sure. For people who want more information about Yu-Ting’s research or other research from The St. Louis Fed, visit StLouisFed.org. You can also stream and subscribe to all of our episodes on Apple Podcasts, Spotify, or wherever you get your podcasts.

Thanks so much for listening.