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Measuring Economic Policy Uncertainty

Abstract

We develop a new index of economic policy uncertainty (EPU) based on a range of indicators, including the frequency of newspaper references to policy uncertainty. Our index spikes near tight presidential elections, after the Gulf wars, the 9/11 attack, the Lehman bankruptcy, and during the 2011 debt ceiling debate. Several pieces of evidence – including a human audit of 5,000 newspaper articles – indicate that our EPU index offers a good proxy for movements in policy-related economic uncertainty over time. Using micro data, we investigate the effects of EPU on investment and hiring, finding negative effects for firms heavily exposed to government contracts. At the macro level, positive innovations in our EPU index foreshadow declines in investment, output and employment in VAR models. Extending our measurement efforts back to 1900, we find that EPU rose dramatically in the Great Depression, but only from 1932 onwards when Hoover and then Roosevelt initiated a period of intense policy activism. We also find a secular rise in policy uncertainty since the 1960s, coincident with government fiscal and regulatory expansion.

To download the PDF version of the working paper click here.


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