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Uncovering Economic Policy Uncertainty During Conflict

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  • Brochet, Sophie
  • Mueller, Hannes
  • Rauh, Christopher

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, Sophie & Mueller, Hannes & Rauh, Christopher, 2025. "Uncovering Economic Policy Uncertainty During Conflict," CEPR Discussion Papers 20560, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:20560
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    JEL classification:

    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F51 - International Economics - - International Relations, National Security, and International Political Economy - - - International Conflicts; Negotiations; Sanctions
    • H56 - Public Economics - - National Government Expenditures and Related Policies - - - National Security and War

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