Measuring Economic Policy Uncertainty

Measuring Economic Policy Uncertainty

October 2015 | Scott R. Baker, Nicholas Bloom, Steven J. Davis
The paper develops a new index of economic policy uncertainty (EPU) based on newspaper coverage frequency, reflecting the frequency of articles containing terms related to economic uncertainty and policy-related topics. The index spikes near significant political events such as presidential elections, wars, and financial crises. The authors validate the EPU index through various methods, including a human audit study and comparisons with other measures of economic uncertainty. They find that policy uncertainty increases stock price volatility and reduces investment and employment in sectors sensitive to policy changes, such as defense, healthcare, and infrastructure construction. At the macro level, policy uncertainty innovations are associated with declines in investment, output, and employment in the United States and other major economies. The paper also extends the EPU index back to 1900, showing a dramatic rise in the 1930s and an upward drift since the 1960s. The authors conclude that policy uncertainty has significant economic impacts, particularly in sectors heavily reliant on government spending.The paper develops a new index of economic policy uncertainty (EPU) based on newspaper coverage frequency, reflecting the frequency of articles containing terms related to economic uncertainty and policy-related topics. The index spikes near significant political events such as presidential elections, wars, and financial crises. The authors validate the EPU index through various methods, including a human audit study and comparisons with other measures of economic uncertainty. They find that policy uncertainty increases stock price volatility and reduces investment and employment in sectors sensitive to policy changes, such as defense, healthcare, and infrastructure construction. At the macro level, policy uncertainty innovations are associated with declines in investment, output, and employment in the United States and other major economies. The paper also extends the EPU index back to 1900, showing a dramatic rise in the 1930s and an upward drift since the 1960s. The authors conclude that policy uncertainty has significant economic impacts, particularly in sectors heavily reliant on government spending.
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