Working Paper: NBER ID: w29714
Authors: Scott R. Baker; Steven J. Davis; Jeffrey A. Levy
Abstract: We quantify and study state-level economic policy uncertainty. Tapping digital archives for nearly 3,500 local newspapers, we construct three monthly indexes for each state: one that captures state and local sources of policy uncertainty (EPU-S), one that captures national and international sources (EPU-N), and a composite index that captures both. EPU-S rises around gubernatorial elections and own-state episodes like the California electricity crisis of 2000-01 and the Kansas tax experiment of 2012. EPU-N rises around presidential elections and in response to 9-11, Gulf Wars I and II, the 2011 debt-ceiling crisis, the 2012 fiscal cliff episode, and federal government shutdowns. Close elections elevate policy uncertainty much more than the average election. VAR models fit to pre-COVID data imply that upward shocks to own-state EPU foreshadow weaker economic performance in the state, as do upward EPU shocks in contiguous states. The COVID-19 pandemic drove huge increases in policy uncertainty and unemployment, more so in states with stricter government-mandated lockdowns.
Keywords: Economic Policy Uncertainty; State-Level Analysis; Economic Performance; Political Elections; VAR Models
JEL Codes: D80; E32; E66; G18; H70; R50
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| upward shocks to own-state economic policy uncertainty (EPU) (D89) | weaker economic performance (F69) |
| upward shocks to own-state economic policy uncertainty (EPU) (D89) | higher unemployment rates (J64) |
| upward shocks to own-state economic policy uncertainty (EPU) (D89) | lower employment levels (J68) |
| upward shocks to own-state economic policy uncertainty (EPU) (D89) | weaker housing markets (R31) |
| upward shocks in EPU from neighboring states (H79) | negative effect on economic performance of one's own state (F69) |