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Discussion Paper Details

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Title: Measuring Economic Policy Uncertainty

Author(s): Scott R. Baker, Nicholas Bloom and Steven J Davis

Publication Date: October 2015

Keyword(s): business cycles, economic uncertainty, fluctuations and policy uncertainty

Programme Area(s): International Macroeconomics and Finance, Macroeconomics and Growth and Monetary Economics and Fluctuations

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 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.

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Bibliographic Reference

Baker, S, Bloom, N and Davis, S. 2015. 'Measuring Economic Policy Uncertainty'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=10900