Policy Regimes versus Economic Regimes
Policy regimes do not map cleanly to economic outcomes, but many historical episodes have shades of similarity that can help to analyze regimes and build more resilient portfolios.
Policy impacts the economy, but policy regimes and economic regimes are not interchangeable. The dictates of policy often sound like clean breaks, while economic realities blur across the boundaries. Luckily, this ambiguity can be an advantage. Instead of treating policy regimes like the zero interest rate policy (ZIRP) as a binary classification, we argue that it is more informative to consider relevance as a matter of degree. For example, even though prior decades did not have zero interest rates, they still contained episodes with similar dynamics that can inform the tendencies of ZIRP periods. We show how to do these data-driven comparisons rigorously, and we construct illustrative portfolios that reveal clear and intuitive differences across regimes.
