Uncovering Economic Policy Uncertainty During Conflict

Christopher Rauh, Sophie Brochet and Hannes Mueller

No 1499, Working Papers from Barcelona School of Economics

Abstract: The correct measurement of economic policy uncertainty (EPU) plays a critical role in many policy settings -in particular where economic policy decisions need to be taken in response to large shocks. One such large shock is armed conflict. But, counterintuitively, the standard text-based EPU index systematically declines during armed conflict periods. Using a global news corpus covering 192 countries and over 5 million articles, we show that this decline is driven not by reduced uncertainty, but by a crowding out of reporting on economics and policy. We show that a combination of topic modeling and two-way fixed effects can be used to adjust the measurement of EPU, providing a new view on political risk during armed conflict. After adjustment, the EPU aligns more closely with firm perceptions, political risk insurance and investment during armed conflict.

Keywords: armed conflict; Macroeconomic uncertainty; Measurement Bias; Text-Based Indices (search for similar items in EconPapers)
JEL-codes: C43 D80 E32 F51 H56 (search for similar items in EconPapers)
Date: 2025-07
New Economics Papers: this item is included in nep-ene and nep-reg
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