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 articlesindicate that our index proxies for movements in policy-related economic uncertainty. Our US 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 raises stock price volatility and reduces investment and employment in policy-sensitive sectors like defense, healthcare, and infrastructure construction. At the macro level, policy uncertainty innovations foreshadow declines in investment, output, and employment in the United States and, in a panel VAR setting, for 12 major economies. Extending our US index back to 1900, EPU rose dramatically in the 1930s (from late 1931) and has drifted upwards since the 1960s.

Uncertainty About Federal Reserve Policy and Its Transmission to Emerging Economies: Evidence from Twitter

“…To estimate the effects of uncertainty, we need data (i) that is available on a high frequency in order to reflect the high-speed transmission of information on financial markets, (ii) that reflects uncertainty of actual market participants, not of the overall economy, and (iii) that allow us to isolate the specific uncertainty about monetary policy from the uncertainty about other fields of economic policy. For the latter reason, the commonly used indicator of policy uncertainty from Baker, Bloom, and Davis (2013) cannot be used as it summarizes uncertainty on a wide range of policy areas.…”

“…Instead of measuring expectations by counting newspaper articles like in Baker, Bloom, and Davis (2013) or inferring investor uncertainty from financial products, we turn to social media. Due to its ubiquity and responsiveness, social media is a promising data source for all research questions for which uncertainty of market participants plays an important role.…”

“…Gauvin, McLoughlin, and Reinhardt (2014) provided evidence of general policy uncertainty in mature economies as a determinant of international capital flows to emerging economies. They used the policy uncertainty indicators of Baker, Bloom, and Davis (2013), but not a focused measure of specific monetary policy uncertainty such as the one used in this paper. They also showed that fundamentals play a role in determining the magnitude of spillover effects.…”

“…This gives us an index of uncertainty that is directed to a very specific monetary policy decision. This is an important advantage over uncertainty indicators used in the literature, e.g., Baker, Bloom, and Davis (2013), which often reflect a broad, unspecific notion of uncertainty.…”

Uncertainty, redistribution, and the labor market since 2007

“…Economists have noted that uncertainty has increased a lot since 2007, and they have offered measures of the amount of added uncertainty (Bloom et al 2011). Unlike the VIX index, the safety net did not quickly return to what it was before the recession.…”