Measuring Economic Policy Uncertainty*

Abstract

We develop a new index of economic policy uncertainty (EPU) based on newspaper coverage frequency. Several types of evidence—including human readings of 12,000 newspaper articles—indicate that our index proxies for movements in policy-related economic uncertainty. Our U.S. index spikes near tight presidential elections, Gulf Wars I and II, the 9/11 attacks, the failure of Lehman Brothers, the 2011 debt ceiling dispute, and other major battles over fiscal policy. Using firm-level data, we find that policy uncertainty is associated with greater stock price volatility and reduced investment and employment in policy-sensitive sectors like defense, health care, finance, and infrastructure construction. At the macro level, innovations in policy uncertainty foreshadow declines in investment, output, and employment in the United States and, in a panel vector autoregressive setting, for 12 major economies. Extending our U.S. index back to 1900, EPU rose dramatically in the 1930s (from late 1931) and has drifted upward since the 1960s.

Predicting the probability of recession in Croatia: Is economic sentiment the missing link?

“…Karnizova and Li (2014) estimate a probit model of US recessions with standard explanatory variables: interest rate spreads, stock market returns and stock market volatility. They make a solid contribution by adding an insofar mostly neglected psychological factor: economic uncertainty quantified by Baker et al (2016). The empirical results obtained by Karnizova and Li (2014) seem remarkable: economic uncertainty outperforms each of the analyzed predictors (including the term spread) at horizons longer than five quarters.…”

“…Finally, Karnizova and Li (2014) add a new dimension to this strand of literature by examining the predictive accuracy of a psychological factor. Since the Baker et al (2016) economic policy uncertainty index (or any other similar uncertainty indicator) does not exist for Croatia; the authors utilize ESI as a proxy variable and question its significance in predicting the Croatian recessions.…”

‘Strong on quantity, weak on quality’: China’s financial reform between 1978 and 2018

“…Given that SOEs performed much worse than non-SOEs, on average, this rise in 'bad' leverage and fall in 'good' leverage are truly worrisome. We attribute this latest divergence of state and nonstate corporate leverages to rising uncertainty about economic policy (Bachmann et al 2013;Baker et al 2016). This pattern is clear even among listed companies: as economic policy uncertainty increases, private companies become more cautious and postpone their investment and recruitment plans, while SOEs continue to expand ).…”

The Impact of Brexit on the Stock Markets of the Greater China Region

“…The sample covers the period June 2015 to December 2017, allowing the study of stock markets before and after the outcome of the Brexit referendum. To control for political instability, the EPU index for the UK (Baker et al 2016) and the VIX Index are also included as part of the study. The UK EPU index is computed on the basis of daily news from newspaper archives that contain thousands of newspapers and other news sources from across the globe.…”

“…The UK EPU index is computed on the basis of daily news from newspaper archives that contain thousands of newspapers and other news sources from across the globe. Studies using EPU indices (Baker et al 2012(Baker et al , 2014(Baker et al , 2016 suggest that the indices are a good proxy for real-word economy policy uncertainty (Wang et al 2014). The OLS and the robust OLS regression estimation processes were considered to support the market models' estimations.…”