Partisan Conflict and Economic Policy Uncertainty: What Drives What? A Time-Varying Look at U.S. Politics
New research uncovers how partisan conflict and policy uncertainty interact, and why the causal direction changes across domains such as fiscal policy, trade, regulation, and financial markets.
How much does political polarization really matter for the economy? And more importantly, does partisan conflict drive economic policy uncertainty, or does uncertainty itself fuel political division?
A new study titled “Partisan Conflict and Economic Policy Uncertainty: Insights from a Time-Varying Causality Approach” sheds light on these questions using nearly four decades of monthly U.S. data (1985–2025). By combining the Partisan Conflict Index with both aggregate and disaggregated Economic Policy Uncertainty (EPU) measures, the analysis uncovers when political conflict drives uncertainty, when uncertainty triggers partisan escalation, and why these links evolve over time.
Why Partisan Conflict and Policy Uncertainty Matter
The United States is a global economic anchor. When U.S. policy becomes uncertain, through debates on taxes, spending, trade, or regulation, the effects spill across businesses, markets, and even international partners. Equally, when political actors engage in intense conflict, the policy environment becomes harder to predict.
Yet the relationship between politics and uncertainty is not static. Some shocks, such as trade tariffs or financial regulation failures, can ignite partisan confrontation. Other times, political gridlock is the primary source of economic volatility.
Key Insight #1: Political Conflict Usually Comes First
The study shows that, across most policy domains, partisan conflict systematically precedes increases in economic policy uncertainty. This is particularly true in three areas:
- - Fiscal policy uncertainty: budget gridlock, debt-ceiling crises, and shutdown threats
- - Tax policy uncertainty: shifting tax proposals, legislative disputes, expiring tax provisions
- - Government spending uncertainty: appropriations battles, relief packages, and emergency funding
These domains are institutionally exposed to congressional stalemate, making them especially sensitive to political polarization.
Key Insight #2: But Sometimes the Causality Reverses
In certain policy areas, the flow goes the other way, i.e. uncertainty spikes first, and partisan conflict follows. This occurs mostly during:
- - Trade shocks (e.g., tariff waves, NAFTA renegotiations)
- - Financial regulation crises (e.g., Enron, FTX, Silicon Valley Bank)
- - Regulatory turbulence (e.g., rulemaking changes in energy, climate, or corporate disclosure)
Here, the economic shock acts as a trigger, intensifying political signaling and partisan confrontation.
Key Insight #3: The Relationship Changes Over Time
The study uses a time-varying Granger causality framework, allowing the direction and strength of causality to shift across decades. It finds that:
- - The causal relationship weakens during recessions — crises tend to reduce partisan signaling (“rally-round-the-flag” dynamics).
- - The pattern changes during major political transitions, such as the post-2016 increase in polarization.
- - Different institutions shape how conflict and uncertainty interact. For example, the Federal Reserve remains largely insulated, with very few political→monetary shocks.
Why Decomposing Uncertainty Matters
A major contribution of this research is its use of 11 different EPU sub-indices. Aggregated uncertainty can hide important variation. For example:
- - Fiscal uncertainty affects business hiring and investment.
- - Monetary uncertainty affects interest rates, inflation expectations, and bond markets.
- - Trade uncertainty disrupts supply chains and export decisions.
The study shows that each sub-index has a distinct causal relationship with partisan conflict, a granularity that static models cannot capture.
Policy Lessons
The findings point to several actionable implications:
- 1. Strengthen institutional guardrails in fiscal policy
Automatic stabilizers, multi-year budgeting, and independent fiscal councils can reduce the risk that political battles destabilize economic expectations.
- 2. Protect central bank independence
Episodes where monetary uncertainty spills into partisan conflict highlight the need for clear communication and non-politicized monetary governance.
- 3. Reduce regulatory and entitlement uncertainty
Phased rollouts, bipartisan oversight committees, and transparent consultation processes can reduce policy whiplash during political transitions.
- 4. Depoliticize external shocks
Trade conflicts, sovereign risk events, or global crises should be managed through stable bipartisan processes to avoid feeding political division.
What This Means for Democracy and the Economy
Uncertainty is not just an economic issue, it is a political one. Elevated uncertainty can harden partisan identities, fuel zero-sum thinking, and make compromise more difficult. Conversely, intense political conflict reduces the predictability of economic policy, increasing volatility and undermining institutional trust.
By showing when and where these cycles emerge, and when they reverse, the study offers a roadmap for designing more resilient political and economic institutions.
Conclusion
The central message is clear: partisan conflict is usually the cause, not the consequence, of policy uncertainty. But during major shocks, the causal arrow flips, as uncertainty itself can feed political division. Understanding these dynamics is essential for crafting policies that stabilize both the economy and democratic governance.
For policymakers, economists, and political scientists, this time-varying, domain-specific approach provides a deeper and more precise way of diagnosing where political–economic frictions originate, and how they might be mitigated.
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