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Measuring Economic Policy Uncertainty

Scott Baker (), Nicholas Bloom () and Steven Davis ()

No 10900, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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.

Keywords: business cycles; economic uncertainty; fluctuations; policy uncertainty (search for similar items in EconPapers)
JEL-codes: D80 E22 E66 G18 L50 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac
Date: 2015-10
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Journal Article: Measuring Economic Policy Uncertainty (2016) Downloads
Working Paper: Measuring Economic Policy Uncertainty (2015) Downloads
Working Paper: Measuring economic policy uncertainty (2015) Downloads
Working Paper: Measuring Economic Policy Uncertainty (2015) Downloads
Working Paper: Measuring Economic Policy Uncertainty (2015) Downloads
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