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Uncovering Economic Policy Uncertainty During Conflict

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  • Brochet, S.
  • Mueller, H.
  • Rauh, C.

Abstract

The correct measurement of economic policy uncertainty (EPU) plays a critical role in many policy settings - in particular where economic policy decisions need to be taken in response to large shocks. One such large shock is armed conflict. But, counterintuitively, the standard text-based EPU index systematically declines during armed conflict periods. Using a global news corpus covering 192 countries and over 5 million articles, we show that this decline is driven not by reduced uncertainty, but by a crowding out of reporting on economics and policy. We show that a combination of topic modeling and two-way fixed effects can be used to adjust the measurement of EPU, providing a new view on political risk during armed conflict. After adjustment, the EPU aligns more closely with firm perceptions, political risk insurance and investment during armed conflict.

Suggested Citation

  • Brochet, S. & Mueller, H. & Rauh, C., 2025. "Uncovering Economic Policy Uncertainty During Conflict," Cambridge Working Papers in Economics 2551, Faculty of Economics, University of Cambridge.
    • Handle: RePEc:cam:camdae:2551
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    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation

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