Working Paper: NBER ID: w21633
Authors: Scott R. Baker; Nicholas Bloom; Steven J. Davis
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.
Keywords: economic policy uncertainty; investment; employment; stock price volatility
JEL Codes: D80; E22; E66; G18; L50
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| economic policy uncertainty (EPU) (D89) | macroeconomic indicators (industrial production and employment) (E29) |
| economic policy uncertainty (EPU) (D89) | stock price volatility (G17) |
| economic policy uncertainty (EPU) (D89) | investment rates (G31) |
| economic policy uncertainty (EPU) (D89) | employment growth rates (O49) |