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Using Natural Language Processing to Measure COVID-19-Induced Economic Policy Uncertainty for Canada and the US

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Abstract

We develop an economic policy uncertainty (EPU) index for Canada and the US using natural language processing (NLP) methods. Our EPU-NLP index is based on an application of several algorithms, including a rapid automatic keyword extraction algorithm (RAKE), a combination of the RoBERTa and the Sentence-BERT algorithms, a PyLucene search engine, and the GrapeNLP local grammar engine. For comparison purposes, we also develop an index based on a strictly Boolean index. We find that the EPU-NLP index captures COVID-19 related uncertainty better than the Boolean index. Using a structural VAR approach, we found that an economic policy uncertainty shock with EPU-NLP results in larger declines in real GDP, employment, industrial production and the TSX index than with EPU-Boolean for Canada. Similar results were also found for the US: an EPU-NLP shock led to larger declines in industrial production, employment, real personal consumption expenditure, and S&P500 than EPU-Boolean. The SVAR model showed an abrupt contraction in economic variables both for Canada and the US in line with the COVID-19 impact. Moreover, an uncertainty shock (with the EPU-NLP) caused a much larger contraction in economic variables for the period including the COVID-19 pandemic, than for the period before COVID-19.

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  • Shafuillah Qureshi & Ba Chu & Fanny S. Demers & Michel Demers, 2022. "Using Natural Language Processing to Measure COVID-19-Induced Economic Policy Uncertainty for Canada and the US," Carleton Economic Papers 22-01, Carleton University, Department of Economics.
    • Handle: RePEc:car:carecp:22-01
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    1. 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.
    2. Altig, Dave & Baker, Scott & Barrero, Jose Maria & Bloom, Nicholas & Bunn, Philip & Chen, Scarlet & Davis, Steven J. & Leather, Julia & Meyer, Brent & Mihaylov, Emil & Mizen, Paul & Parker, Nicholas &, 2020. "Economic uncertainty before and during the COVID-19 pandemic," Journal of Public Economics, Elsevier, vol. 191(C).
    3. Scott R. Baker & Nicholas Bloom & Steven J. Davis & Stephen J. Terry, 2020. "COVID-Induced Economic Uncertainty," NBER Working Papers 26983, National Bureau of Economic Research, Inc.
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