Measuring Economic Policy Uncertainty
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.
You may purchase this paper on-line in .pdf format from SSRN.com ($5) for electronic delivery.
Supplementary materials for this paper:
Document Object Identifier (DOI): 10.3386/w21633
Published: Scott R. Baker, Nicholas Bloom, and Steven J. Davis. 2016. "Measuring Economic Policy Uncertainty." Quarterly Journal of Economics, vol 131(4), pages 1593-1636.