At the top end, firms operating in the guided missiles
In particular, the
years by our measure. 2.3 Methodology of measuring economic policy uncertainty. To investigate this issue, we split our
military deployments and casualties than more recent military conflicts. Finally, we normalize the 10-paper
that newspapers are available for countries around the world, and they have
identification but capturing only a limited set of impact channels—government
the 9/11 attacks, Gulf War I, and the onset of Gulf War II. those issues. reluctance to commit to higher capital spending” (Federal Open Market Committee 2009) See also IMF (2012, pp. Guerron-Quintana
Davis (2015), Chicago Board of Options and Exchange (CBOE 2014, Ilut and Schneider
regulations, and the frequency of large daily stock market moves triggered by news
“health care,” “hospital,” or “health insurance” and “war,” “terrorism,” or
Column (3) adds forecasts from the Survey of Professional
Bloom
1985 to 2014. log(employment). While the
Column (3) evaluates to what extent our EPU measure tells us anything different
major fiscal policy battles and high EPU levels). the EPU index shows stronger responses to war in the Gulf region, the election
newspaper, drawing on archives for seven newspapers in India; six each in Canada
Zakrajsek 2014, Basu
Hartman
health-care, tax, and environmental policies were adding to businesses'
discussions in this regard. The article
cross-sectional structure of investment rates and employment growth. Columns (1) and (2) consider realized volatility and 182-day
the EU index in explaining firm-specific movements in option-implied
In contrast to newspapers (but rather unsurprisingly) the BBs
Guiso
Finally, there is a rapidly growing literature on text search methods—using newspaper
while the government purchases variable remains positive and significant. refer to more than one policy category. For full access to this pdf, sign in to an existing account, or purchase an annual subscription. government behavior.
indexes, because its high text density facilitates measurement by time period
Given
little to small ones. following policy terms: “Congress,” “deficit,” “Federal Reserve,” “legislation,”
We focus on simple linear specifications that do not allow for rich response
Pietro
We also construct EPU indexes for 11 other major economies.11 As with our U.S. index, we first obtain a monthly count of articles that
We
investment and employment with heightened policy uncertainty, which points to a
Russian index is noisy, reflecting our reliance on a single paper, it shows that
upward drift since the 1960s, perhaps due to rising political polarization or the
variables to first-moment driving forces. investment rate defined as CapExt(Net Plant, Property and Equipment)t−1. how consumers view the short-term economy, the long-term economy, and their own
70–76). in selected industries, yielding increases of up to 23.8 log points for
of our EPU index. responses, even in the face of large negative shocks. earlier eras and in countries with fewer data sources. Johannes
implied volatility for firms in the health care sector responds to the health
also show distinct variation. Zakrajsek 2014), managerial risk aversion (e.g., Panousi and Papanikolaou 2012), and interactions between
In each instance, we
Stefan
Forecasters of government purchases relative to GDP (interacted with firm-level
. Taking
growth rate of 3.4% for firms in the sample. Times, Boston Globe, Chicago
example, to ensure that auditor-learning effects are not confounded with
Except for the last row, all
Zakrajsek
Since aggregate U.S. investment data are not
Calculating this net error rate from
This long-span EPU index highlights pre–World War II
incentives for careful work, we randomly assigned about one quarter of the
At a minimum, they let us gauge whether
. fluctuations, policy uncertainty, and stock market volatility.5. As seen in Online Appendix Figure C6, we find precisely that.
The sample period runs from 1985 to 2012. conflict between North and South Korea or events like the U.K. Brexit vote
and Ion (2016). Egon
set if we were to sample randomly from all newspaper articles. Standard errors based on clustering
We use micro data from the
. Pablo
The results suggest that elevated policy uncertainty in the
of World War I, the Versailles conference in 1919, and a sustained surge in policy
magnitude of aggregate effects, in part because they capture only a limited set of
assessing the causal role of policy uncertainty in macroeconomic performance by,
review the trial codings, and additional trial codings and feedback when
And lastly, they check for economic foreca…
parallel the earlier ones for stock price volatility. assurance that our computer-automated EPU classifications track the actual
for each three-digit SIC. “regulation,” or “White House” (including variants like “uncertainties,”
evidence about movements in policy-related uncertainty over time. policy uncertainty measures, newspaper-based indexes offer distinct advantages. Figure IV and Online Appendix Figure A1 display the historical EPU indexes for
human EPU index to 100 over the period. These results are in line
Panousi
Youngsuk
Jonathan
Matthew
Stock
The next 11 rows report
John
January 1996, although those shutdowns received quite a lot of press
Figure IX shows that the basic
about economic uncertainty, without any stipulation that these articles also
indexes for U.S. states based on newspapers and other local indicators, finding
Hsin-min
Sydney
EPUC = 0 or 1 for each article in the sample. We find that, since 2008, economic policy uncertainty in the United States has been at a level approximately two times its long run average. factors in order of their importance to the firm. uncertainty from late 1931 when President Herbert Hoover, and then President
Uncertainty, Notes. health care and entitlement programs. Our match rates compare
by the VIX index for the average firm, but the EPU index provides additional
, Higgs
discuss policy.
For
We provide regular monthly updates of the country-level EPU indexes at http://www.policyuncertainty.com. equipment. index.
policy uncertainty to firm-level stock price volatility, investment rates, and
time-series index. attacks (Figure II). These responses are statistically
mainly due to their strong exposures to government purchases and the rise in
(2007), Gulen
Elstener
Table I reports all 11
We develop new measures of economic policy uncertainty for the United States and 11
implied volatility on our EPU index and the ratio of federal government
correlation of 0.912 with the Michigan index.
terms. indexes constructed by dropping the six baseline terms, one at a time. 5,460 firms from 1996 to 2012. the VIX as an explanatory variable (interacted with firm-level exposure to
We used the pilot study to develop a training
We met with the audit teams on a weekly basis to address questions,
Although this calculation
As noted in Section III.C, our EPU index and the VIX have a
(FOMC). April 07, 2017. As seen in Figure II, the national security EPU index spiked sharply in connection with
peak decline of about 6% in response to a 90-point EPU innovation. If right-leaning (left-leaning) newspapers seriously
It’s also worth noting that our VAR results may understate the importance of
government purchases. Youngsuk
computer and human EPU index values. Finally, our indexes have a market use validation: commercial data providers that
an important source of distinct variation in the two measures. Hopes, Realities, Risks, “Political Uncertainty and Corporate Investment
interacted specification with controls for firm and time effects. and assisted other researchers in developing EPU indexes for Holland and
This ubiquity, coupled with modern databases and computers, offers
obtain this measure for firms that delisted before 2006. stands out as a period of unusually high EPU in the United Kingdom (which
As before, we rely on a Cholesky decomposition to identify
, “Partisan Conflict and Private Investment,” NBER Working Paper
Bhagat, Vincent Bignon, Yongsung Chang, Vladimir Dashkeyev, Jesus
regressing firms’ 30-day implied stock price volatility on economic policy
In a categorical breakdown
real activity measures. average frequency of EPU articles from 1985 to 2014.
our policy uncertainty index a firm with, say, a 50% government revenue share
As an example of how adding “tax” to the policy term set yields a false
among professional forecasters over future government purchases and consumer
high exposures to government purchases, the estimates imply that swings in
general elections in 1998. similar, with a correlation of 0.86. Baker
almost never mention monetary policy uncertainty. We are open to proposals to developing indexes for other countries. Perfect Competition,”, “Investment, Idiosyncratic Risk and
Reassuringly, all three measures
index of 30-day option-implied volatility in the S&P500 index, available
Max
Because papers enter and
individual E, P, or U term sets or the precise scaling of the EPU index. change in policy uncertainty from 2006 to 2012. For
Kuester
category-relevant terms: “the Fed,” “central bank,” “interest rate,”
post-1960s upward drift of EPU evident for the United States is absent for the
Measuring Economic Policy Uncertainty. Financial regulation and
Nuno
5. Robustness Checks for Option-Implied Stock Price Volatility and Policy
Columns (5) and (6) run a similar evaluation for the EU index, yielding similar
, “The Real Effects of Political Uncertainty: Elections and
Despite the challenges, VARs are useful for
run-up in their respective category-specific EPU indexes, and 3.3 to 4.6 log
Nalewaik
Ronen
experience greater stock price volatility when policy uncertainty is high and
options literature highlights how uncertainty suppresses demand for input
25% of its output to the federal government, this EPU change and the coefficient
United Kingdom; and one each in China and Russia.13. not surprising—the EU index reflects the overall frequency of newspaper articles
data on the timing and closeness of democratic national elections from Julio and Yook (2012, 2016), updating their data to cover
supervision read and coded articles drawn from eight newspapers from 1900 to
Tracking global economic uncertainty: implications for global investment and trade. Evidence from US Daily
future economic conditions. contracts, which we allocate to three-digit SIC industries using industry codes
process and refine our audit guide. We also construct long-span monthly EPU indexes back to 1900 for the United
daily EPU index. Board of Governors of the Federal Reserve System Working Paper. Ng
especially in recent years.
referees and editors, Robert Barro and Larry Katz, for comments and
27. across countries, and to specific policy categories. Thus, we scale the raw counts by the
“USA Instruments”). Nicholas
We find more than 8,000 articles about these shutdowns in Newsbank archives,
Milton
averages these differences and normalizes by the base period (December 1968)
our category-specific EPU indexes. articles in the full-scale audit for our analysis here. To monitor audit quality and sharpen
in policy-exposed sectors, but the near-term association with their output
Other researchers who use our EPU indexes in
11 policy categories and subcategories. purchasesGDP × intensity is the change in federal
Metcalf (1999), among others, consider the detrimental economic effects
departures—for example, war and national security threats produce declines in
21. policy decisions, what economic policy actions will be undertaken
in response to uncertainties surrounding the Affordable Care Act. in the precrisis years to 61.5 in 2008:9 to 2009:12 and 78.3 from 2010 to 2013.
Drawing causal inferences from VARs is extremely challenging—in part
Online Appendix Figure C9 shows that the basic character of the
sets, and weighting methods. we return to Online Appendix Table A.1 and carry out calculations that
Pietro
Julio
government exposure—like defense, health care, engineering services, and heavy
Allowing for this type of asymmetry may lead to a larger
In other words, to meet our criteria, an article
The second
the policy requirement in the EPU index. Several types of evidence — including human readings of 12,000 newspaper articles — indicate that our index proxies for movements in policy-related economic uncertainty. For a richer treatment of dynamics in firm-level investment rate
BB policy uncertainty indicator shows little immediate response to the
These
behalf of President and Fellows of Harvard College.
We develop a new index of economic policy uncertainty (EPU) based on newspaper coverage frequency.
total. needed. If the firm operates in a single
employment in policy-sensitive sectors like defense, health care, finance, and
At the macro level, innovations in policy uncertainty foreshadow declines in investment, output, and employment in the United States and, in a panel vector autoregressive setting, for 12 major economies. newspaper-based measures of policy uncertainty. , “. Third, the share of EPUH = 1
sovereign debt concerns figure more prominently in the BBs than in
which concentrates our (expensive) human resources on samples that are
industries.
Franklin Roosevelt, introduced a rash of major new policies.
Policy uncertainty related to financial regulations and entitlement programs
The 1930s and
policy uncertainty involve material changes in investment rates. Boehnke, Vladimir Dashkeyev, Olga Deriy, Eddie Dinh, Yuto Ezure, Robin Gong,
, “Policy Uncertainty, Irreversibility, and Cross-Border Flows of
Economic Uncertainty and the Recovery . suffered severe economic turmoil over this period, including the IMF bailout and
include “business,” “industry,” “commerce,” and “commercial.” The expanded and
To address these concerns,
presidential elections, Gulf Wars I and II, the 9/11 attacks, the failure of
to assess whether an article meets our criteria for economic uncertainty and
This article relates to at least three strands of literature. Bloom
compare the time-series behavior of human and computer-generated EPU indexes, and
We use these new measures to investigate the relationship of
, “Uncertainty and the Geography of the Great Recession,” AEI
In other related work, Julio and Yook
Hence, for firms with
As
Stan
federal purchases/GDP, and VIX measures with the intensity of the firm’s
Mergers and Acquisitions: A Text-Based Analysis,”, World Economic Outlook:
question would be part of the baseline set. . To measure this exposure, we
The most obvious comparator is the VIX, an
steadily over time, perhaps because firms are providing increasingly detailed
Our modern monthly EPU index for the United States relies on 10 leading
Extending our U.S. index back to 1900, EPU rose dramatically in the
purchases of goods and services and certain aspects of regulatory policy. investment, 1.1% in industrial production, and 0.35% in employment. VIX reflects implied volatility over a 30-day look-ahead period, our EPU index
very similar results. treatments to our policy uncertainty measures, but we leave that task to future
To push back to 1900, we rely on archives for six major U.S. newspapers published
Our approach to measuring policy uncertainty raises potential concerns about
The sample shrinks for several reasons. Hence, we focus on our 10-paper monthly EPU index, but the
For their uncertainty measure, they used the Index of Economic Policy Uncertainty (EPU) developed by Scott Baker, Nicholas Bloom and Steven Davis. surveys, and financial markets data.
(academic.oup.com/qje).
economic policy uncertainty based on our criteria. 1593-1636. policy uncertainty in DSGE models, finding moderately negative effects, while Pastor and Veronesi (2012, 2013) model the theoretical links among
Concerns about policy uncertainty have intensified in the wake of the global
use words preferred by one party or the other in congressional speech. variants like “regulatory,” “taxation,” etc.). index from 1985 to 1995, which predates the sample period in Table II. discusses economic uncertainty and includes remarks about taxable and tax-exempt
overplay EPU when Democrats (Republicans) are in power, political slant could
not capture all relevant 10-K filings, perhaps because some firms present their
yield highly significant results similar to column (2) in Table II. Our work
Compute the mean over newspapers of Yit in each month to obtain the series Zt. Activity, “What Drives Media Slant? Each new auditor underwent a training process that
collapse—events with strong financial and stock market connections. $500 million in annual sales. associated with greater stock price volatility and reduced investment and
As remarked in Section I, using newspaper-based measures of EPU raises several issues
overall policy uncertainty. , Davis
These results are in
uncertainty measures from 2006 to 2012. 11. exposure) as a control, and column (4) uses actual future government purchases
securities, but it contains no discussion of policy matters. Prices,”, “Political Uncertainty and Risk
about one third of private employment (Davis et al. category. level). Section II describes the data we use to construct our policy uncertainty indexes. and weekly team meetings. Averaging across firms by
Azzimonti
Art
EPU index, which jumped up in Gulf Wars I and II and after the 9/11 terrorist
Commission did not mandate a risk factors discussion before 2006, so we cannot
Economic uncertainty in the UK can be illustrated by using these Bank of England forecast charts for economic growth. We have recently developed additional EPU indexes for Australia and Brazil
uncertainty indicator based on the fact that firms generally discuss risk
. The former has a significant negative coefficient of − 0.032,
within the range of EPU movements experienced by the individual countries. significant negative results for terms involving log changes in the health care
Rubio-Ramirez
Our audit study also speaks to several other questions related to our EPU
reduced investment rates and employment growth when policy uncertainty rises. bivariate VAR with reverse ordering, including the VIX (after the EPU index),
Our
Real-Activity Macro Surprises,”, “Disentangling the Channels of the 2007–2009
must contain terms in all three categories pertaining to uncertainty, the
Shoag and Veuger (2015) develop policy uncertainty
Davis (2015), we characterize all large daily moves (greater than
uncertainty to matter at the aggregate level. For
present, or future policy actions. Similarly,
finding suggests that political slant does not seriously distort variation over
firm entry, Gulen and Ion (2016) find negative responses of corporate investment to our EPU index, Koijen, Philipson, and Uhlig (2016) develop evidence that government-induced uncertainty about profitability
More sophisticated treatments of
Brandon
of “noneconomic” policy matters, for example, military actions. Lehman Brothers failure in 2008, the 2013 “taper tantrum” triggered by a
number of sentences, so as not to overstate the rising importance of
States (drawing on digital archives for the Wall Street
Bloom
Finally, following Baker, Bloom, and
(2014), and Scotti (2016), with a review in Bloom (2014). To assess the time-series performance implied by our automated
Juan
In column (7), we measure exposure by the slope
Cycle,”, “The Asset Pricing Implications of Government
We start with a discussion of our audit study, which relies on human
The guide includes coding instructions, numerous examples, and FAQs. Serena
discuss uncertainty about what economic policies will be undertaken (or
All regressions weighted by the firm’s average sales in the sample
To see this point,
possible to match data from 10-K filings to Compustat. preclude us from scaling by the count of all articles. country fixed effects and an election timing indicator as explanatory variables,
100 articles (not included in the audit sample), a one-on-one meeting to
more fundamentally, they rely on the content of newspaper articles.
Federico
study. far of elevated policy uncertainty in recent years. Koijen
awards to obtain the ratio of federal purchases to revenues in each three-digit
funds rate, log employment, and log industrial production. using “BOJ” for Japan) and idiosyncratic (e.g., inclusion of “customs duties”
We record the explanation(s), according to the article, and classify it as
We build indexes of policy-related economic uncertainty based on newspaper coverage
The additional criteria involve the presence of one or more
peak drop in industrial production of about 1% and a rise in the unemployment
side. in other countries, often alongside domestic policy concerns. Boudoukh
Working again with the
Walter
PurchasesGDP)* Intensity, given the forward-looking nature of investment decisions, and
analogous to Table I (not
of EPU. relative frequency values for specific policy categories and time periods. and developments. This paper exploits a data rich environment to provide direct econometric estimates of time-varying macroeconomic uncertainty. In this way, we capture federal contracts of the publicly listed
2009 in the degree to which firms express concerns about their exposure to