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Measuring Economic Policy Uncertainty

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  • Scott R. Baker
  • Nicholas Bloom
  • Steven J. Davis

Abstract

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.

Suggested Citation

  • Scott R. Baker & Nicholas Bloom & Steven J. Davis, 2016. "Measuring Economic Policy Uncertainty," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 131(4), pages 1593-1636.
    • Handle: RePEc:oup:qjecon:v:131:y:2016:i:4:p:1593-1636.
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    File URL: http://hdl.handle.net/10.1093/qje/qjw024
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    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E66 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General Outlook and Conditions
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • L50 - Industrial Organization - - Regulation and Industrial Policy - - - General

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