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Measuring economic policy uncertainty

Baker, Scott R. and Bloom, Nicholas and Davis, Steven J. (2015) Measuring economic policy uncertainty. CEP Discussion Paper, No. 1379. Centre for Economic Performance, London School of Economics and Political Science, London, UK.

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Identification Number: No. 1379

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
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HF Commerce
Sets: Research centres and groups > Centre for Economic Performance (CEP)
Series: Working Papers > CEP Discussion Papers
Date Deposited: 14 Jan 2016 14:48
Last Modified: 14 Jan 2016 14:48
Funders: Economic and Social Research Council
URI: http://eprints.lse.ac.uk/id/eprint/64986

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