Measuring Economic Policy Uncertainty

We develop a new index of economic policy uncertainty (EPU) based on newspapercoverage frequency. Several types of evidence—including human readings of 12,000newspaper articles—indicate that our index proxies for movements inpolicy-related economic uncertainty. Our U.S. index spikes near tightpresidential elections, Gulf Wars I and II, the 9/11 attacks, the failure ofLehman Brothers, the 2011 debt ceiling dispute, and other major battles overfiscal policy. Using firm-level data, we find that policy uncertainty isassociated with greater stock price volatility and reduced investment andemployment in policy-sensitive sectors like defense, health care, finance, andinfrastructure construction. At the macro level, innovations in policyuncertainty foreshadow declines in investment, output, and employment in theUnited States and, in a panel vector autoregressive setting, for 12 majoreconomies. Extending our U.S. index back to 1900, EPU rose dramatically in the1930s (from late 1931) and has drifted upward since the 1960s.