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Measuring economic policy uncertainty

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: 15 Sep 2023 23:37
Funders: Economic and Social Research Council
URI: http://eprints.lse.ac.uk/id/eprint/64986

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