DP10900 Measuring Economic Policy Uncertainty
|Author(s):||Scott R. Baker, Nicholas Bloom, Steven J Davis|
|Publication Date:||October 2015|
|Keyword(s):||business cycles, economic uncertainty, fluctuations, policy uncertainty|
|JEL(s):||D80, E22, E66, G18, L50|
|Programme Areas:||International Macroeconomics and Finance, Monetary Economics and Fluctuations, Macroeconomics and Growth|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=10900|
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.