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

measuring economic uncertainty

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