Baker, Scott R., Bloom, Nicholas and Davis, Steven J. (2015) Measuring economic policy uncertainty. CEP Discussion Paper (1379). London School of Economics and Political Science. Centre for Economic Performance, London, UK.
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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.
| Item Type: | Monograph (Discussion Paper) |
|---|---|
| Official URL: | http://cep.lse.ac.uk/ |
| Additional Information: | © 2015 The Authors |
| Divisions: | Centre for Economic Performance |
| Subjects: | H Social Sciences > HB Economic Theory H Social Sciences > HF Commerce |
| JEL classification: | D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D80 - General E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Employment, and Investment > E22 - Capital; Investment (including Inventories); Capacity G - Financial Economics > G1 - General Financial Markets > G18 - Government Policy and Regulation L - Industrial Organization > L5 - Regulation and Industrial Policy > L50 - General |
| Date Deposited: | 14 Jan 2016 14:48 |
| Last Modified: | 11 Dec 2024 19:19 |
| Funders: | Economic and Social Research Council |
| URI: | http://eprints.lse.ac.uk/id/eprint/64986 |
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