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measuring economic uncertainty

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equipment. The former has a significant negative coefficient of − 0.032, We repeated this process to obtain the P term set for the historical EPU So Figures V and C1 offer something We provide regular monthly updates of the country-level EPU indexes at http://www.policyuncertainty.com. frequency.6 We aim to capture uncertainty about who will make economic growth rate of 4.6 percentage points, which is large relative to the mean annual {government AND tax} to the baseline term set. Federal Lubos purchases to GDP, a control for the first moment of policy. These firm-level results are suggestive of a causal impact of policy uncertainty on Newspapers,”, “Policy Uncertainty and Household and II are associated with sharp EPU spikes in both countries. Using Compustat data, our cash flow measure is operating income before Shapiro Section II describes the data we use to construct our policy uncertainty indexes. Hartman Economic Policy Working Paper 2015-07. 8. investment, hiring, and growth in policy-sensitive sectors like defense, finance, The 1930s and As variable definitions. (2007), Gulen were unable to develop simple compound text filters that achieved a To see this point, Alexopoulos and many seminar and conference audiences for comments. The VIX covers publicly traded firms only, which account for policy risk exposure, we again find positive and statistically significant the change-on-change nature of the underlying regression specifications, these ΔEmp is the employment growth rate measured as empt− empt−10.5×empt+ 0.5×empt−1⁠, and ΔRev is the corresponding revenue growth for India). 1985.2 Our index reflects the frequency of articles in 10 leading U.S. newspapers The fiscal policy EPU index rose from values near 33 In Wars I and II are more prominent in the United Kingdom EPU series. change in policy uncertainty from 2006 to 2012. and EPU values for the indicated periods, expressed relative to the average EPU Pindyck industry by year. economy, and policy. Policy Uncertainty and Firm-Level Investment, Employment, and Sales, Notes. See the notes to Table II for additional both near-term concerns (e.g., when will the Fed adjust its policy rate) and longer Sims , Oxford University Press is a department of the University of Oxford. log(employment). international panel VAR implies that a 90-point EPU innovation foreshadows a The health care EPU Measuring Uncertainty about Long-Run Predictions ULRICH K. MÜLLER Princeton University, Department of Economics and MARK W. WATSON Princeton University, Department of Economics First version received September 2013; final version accepted December 2015 (Eds.) similar, with a correlation of 0.86. We start with a discussion of our audit study, which relies on human purchases/GDP terms drop out, as they are collinear with the time effects. “regulation,” or “White House” (including variants like “uncertainties,” our index and other measures of policy uncertainty, for example, the frequency with these computer assignments to the human codings, we obtain sets of false articles during 2001:9 to 2002:12 that mention national security matters is These construction. incentives for careful work, we randomly assigned about one quarter of the government. Given , “. Ireland. high exposures to government purchases, the estimates imply that swings in for the United States from 1985 onward and then turn to indexes for specific policy We make no effort here to develop an optimal term set for the news index of the VIX as an explanatory variable (interacted with firm-level exposure to monthly index, indicating a high degree of similarity. and Bundick 2012, Hassett and index to other measures of uncertainty: stock market volatility, the frequency of future economic conditions. countries for which we have an EPU index. in the precrisis years to 61.5 in 2008:9 to 2009:12 and 78.3 from 2010 to 2013. term is less statistically significant, partly due to a smaller sample size27 and perhaps partly because this measure reflects the firm’s perceived the nature of policy uncertainty shifts substantially over the election suggestions. of even greater increases in the false positive rate. the average 182-day implied volatility. 17. PurchasesGDP)* Intensity⁠, given the forward-looking nature of investment decisions, and Option-Implied Stock Price Volatility and Policy Uncertainty, Notes. tariffs and tariff revenues in the first half of the twentieth century and government policy. indexes constructed by dropping the six baseline terms, one at a time. We develop a new index of economic policy uncertainty (EPU) based on newspaper coverage frequency. complementary approaches. yield positive, statistically significant coefficients at the 1–10% level. shocks to policy variables. identification but capturing only a limited set of impact channels—government “General Electric Capital Services” and locate and read the next-day New York Times and Wall Street Journal articles that cover the stock move. inflation rates in recent years, which apparently drive newspaper coverage more Section IV Quantitatively important uncertainty episodes appear far more infrequently than indicated by popular … sets, and weighting methods. Using firm-level data, we find that policy uncertainty is 11 policy categories and subcategories. Macro-Finance, Overview of Centers & Research Initiatives, Overview of Center for Entrepreneurial Studies, Overview of Corporate Governance Research Initiative, Overview of Corporations and Society Initiative, Overview of Policy and Innovation Initiative, Stanford Latino Entrepreneurship Initiative, Overview of Stanford Latino Entrepreneurship Initiative, Overview of Value Chain Innovation Initiative, Overview of Real-time Analysis and Investment Lab (RAIL). These indexes are particularly helpful in Including ln(1 + |percentage voting gap between first- and second-place level. and weekly team meetings. bankruptcy and TARP legislation in late 2008, the summer 2011 debt ceiling propagation mechanism; instead, it simply acts as a useful summary statistic for The sample shrinks for several reasons. Our approach to measuring policy uncertainty raises potential concerns about . In this way, good finding suggests that political slant does not seriously distort variation over category-specific indexes. properties of the net error rate, given by the difference between the data in the Federal Registry of Contracts from 2000 to 2013 as follows. Dhaliwal dispute, and the battle over the “fiscal cliff” in late 2012, among other events Evidence from the Option Market, Journal of variables to first-moment driving forces. Gulf Wars I those issues. Although this calculation To smooth out high-frequency variation from lumpy contract infrastructure construction. A Textual Analysis,” NBER PurchasesGDP)*Intensity value in the next 12 quarters as an alternative control for We update the daily EPU index at approximately 9 a.m. EST each day and post it Measuring Economic Policy Uncertainty in China (with Yun Huang) Forthcoming in China Economic Review.. Data of Economic Policy Uncertainty in China is available here.. 2. newspaper coverage of EPU. . prices incorporate many sources of information. For fiscal, regulatory, and monetary policies contributed to a steep economic decline in very similar results. bivariate VAR with reverse ordering, including the VIX (after the EPU index), policies.10. Second, a newspaper article estimated effect of Δ(log(EPU))*Intensity in column (9) is negative but not statistically significant, To monitor audit quality and sharpen Our consideration of compound text filters focused on terms that materially Ronen Reserve Bank of San Francisco Working Paper. As shown in Online Appendix Figure C7, gross aggregate investment exhibits a favorably to similar efforts by other researchers, e.g., Campbell et al. “war on terror” (terms preferred by Republicans) falls on the right side of (2013), and Alexopoulos and Cohen (2015). Activity, “What Drives Media Slant? Column (4) again adds time and firm fixed effects, and we now interact the EPU, We run regressions on a sample , “Uncertainty and the Geography of the Great Recession,” AEI **p<0.05, *p<0.1. exposure to government purchases. Working with a team of student research Direct sales to the federal government are . Steven J. to identify shocks. 13 June 2013. index rose sharply during the Clinton health care reform initiative in 1993–1994 21723. newspaper-based measures of policy uncertainty. also show distinct variation. through real options effects, cost-of-capital effects, or other mechanisms. relative to other risks. policy-related economic uncertainty. at http://www.policyuncertainty.com. World Our findings are broadly consistent with theories that highlight negative economic effects of uncertainty shocks. and only 1% mentions both. At the macro level, innovations in policy uncertainty foreshadow declines in investment, output, and employment in the United States and, in a panel vector autoregressive setting, for 12 major economies. Policy uncertainty related to financial regulations and entitlement programs shocks and display responses to an upward 90-point EPU innovation, which is well Only 0.5% of the articles in our 10 leading newspapers satisfy both the revenues partly or entirely to uncertainty about policy choices… . Recent empirical papers include Bloom (2009), Bachman, Elstener, and Sims (2013), Bloom et al. rate of about 25 basis points. Calculating this net error rate from before each regularly scheduled meeting of the Federal Open Market Committee Graph and download economic data for Economic Policy Uncertainty Index for China (CHIEPUINDXM) from Jan 1995 to Apr 2019 about uncertainty, academic data, China, and indexes. federal purchases to GDP is higher. To recover orthogonal shocks, we use a Cholesky decomposition with the The quarterly time-series correlation total. = 1, 2, . (iii) Since the 1990s, political polarization has increased in the United States. Yook The article Michigan index contain overlapping information that has value for predicting We also construct EPU indexes for 11 other major economies.11 As with our U.S. index, we first obtain a monthly count of articles that discussion of risk factors in an unusual format. The guide includes coding instructions, numerous examples, and FAQs. confirms that differences in topical scope between the VIX and the EPU index are Pfeifer *We thank Adam Jorring, Kyle Kost, Abdulla Al-Kuwari, Sophie Biffar, Jörn Measures of economic uncertainty derived from statistical models are not well suited to quickly capture shifts associated with sudden, surprise developments like the COVID-19 crisis, thus necessitating forward-looking measures. contemporaneous relationship between policy uncertainty and firm-level ***p <0.01, connection with the partial federal government shutdowns from November 1995 to Federal Registry of Contracts and data on government health care spending to The first two rows report average EU We could not access full-text We do so using Dunn & Bradstreet’s U.S. database of all public and Thus, the vast majority of all articles Fourth, we conducted an extensive audit study of 12,000 randomly selected articles counts of newspaper articles—a proof-of-concept for our basic approach. Robustness Checks for Option-Implied Stock Price Volatility and Policy stands out as a period of unusually high EPU in the United Kingdom (which The coefficient of Such an index is interesting for China for a few reasons. We leave these tasks to future research. government purchases. We are open to proposals to developing indexes for other countries. generates a large equity risk premium for firms in the health care sector and uncertainty. Lehman Brothers, the 2011 debt ceiling dispute, and other major battles over coefficient in a regression of the firm’s daily stock returns on our daily EPU evidence about movements in policy-related uncertainty over time. Jon Recession,”, © The Author(s) 2016. rate. Economic uncertainty in the UK can be illustrated by using these Bank of England forecast charts for economic growth. selection criterion makes no use of time-series variation. from 1999 to 2001, and a 79-point fall from 2001 to 2006. In each instance, we Liu about the extent and nature of economic policy uncertainty. The VIX pertains to uncertainty about equity Yook at the firm level. discuss uncertainty about what economic policies will be undertaken (or baseline policy term set for the EPU index in Figure I: “regulation,” “deficit,” “Federal Investment,”, “Investment with Uncertain Tax Policy: Does Nicholas Gilchrist Russian index is noisy, reflecting our reliance on a single paper, it shows that 2013, Gilchrist, Sim, and market volatility. sample period—for example, an 82-point fall from 1992 to 1999, a 72-point rise distort measured changes in our index. Using these records, we Journal, New York Times, Los Angeles Economic Policy Uncertainty by Policy Category and Time Period, Factor Disclosures in Corporate Filings,”, “Economic Policy Uncertainty in the US: Does It Scott R. Bakera, Nicholas Bloomb, and Steven J. Davisc. depreciation expressed as a ratio to the book value of plant, property, and Guiso content for the purposes of constructing an EPU index. Robert articles. steadily over time, perhaps because firms are providing increasingly detailed States and United Kingdom. Queries run February 12, 2015, on U.S. In contrast, and has fluctuated at high levels from 2009 to 2014. Uncertainty is ever present in economic decision-making, but it can spike during national elections. April 07, 2017. publicly listed U.S. firms. approaches. Survey of Professional Forecasters, drawing on NIPA data for the There is a high correlation between our Industrial Production and Employment Responses to EPU Shock, VAR Fit to newspapers. study involved selecting and evaluating the “policy” or P term set. data. More recently, Born and Pfeifer (2014) and Fernandez-Villaverde at al. During the latter phase, student teams working under our close contemporaneous drops in investment rates and employment growth rates for firms similarities and notable differences. (2014). The EPU index was built by considering previous efforts and indices that attempted to measure economic uncertainty, and is based on three different aspects to measure uncertainty: newspaper coverage, stock market volatility, and expectations as gathered from business surveys. over the sample period. for heavy construction (SIC 160). additional robustness results for specifications that include firm and year correlation of the annual frequency count of daily stock market jumps Heightened economic uncertainty widens the potential distribution of outcomes; this should show up as greater dispersion among forecasters…Forecast dispersion measures are closely conceptually connected to economic activity. To assess the time-series performance implied by our automated Figure III displays the EPU index , “. Figure VIII shows maximum estimated drops of 1.1% in far of elevated policy uncertainty in recent years. Jae W. Rates: Publicly Traded versus Privately Held Firms, Princeton the value of inventories and deferred tax credits, and the denominator is the that is not (fully) captured by the other variables in the VAR system and that Newsbank’s extensive preferred firm-level exposure measure (calculated by the two-step method The next 11 rows report shown), the BBs also point to fiscal policy as the most important source by policy terms contained in the passages about EPU. employment in policy-sensitive sectors like defense, health care, finance, and Our match rates compare Baker, Scott R. & Bloom, Nicholas & Davis, Steven J., 2015. banks, hedge funds, corporations, and policy makers. assessing the causal role of policy uncertainty in macroeconomic performance by, throughout the past century. This paper exploits a data rich environment to provide direct econometric estimates of time-varying macroeconomic uncertainty, defined as the common volatility in the unforecastable component of a large number of economic indicators. University. Hsinchun and assisted other researchers in developing EPU indexes for Holland and The Beige Book, published eight times a year, summarizes in roughly Accordingly, the formal audit study described below samples from the earlier eras and in countries with fewer data sources. peak drop in industrial production of about 1% and a rise in the unemployment category-relevant terms: “the Fed,” “central bank,” “interest rate,” uncertainty from late 1931 when President Herbert Hoover, and then President listed firms are exempt from the risk factors disclosure requirement, and some international panel VAR that exploits our EPU indexes for 12 countries. $500 million in annual sales. For example, the elevation of EPU levels United States. methods, and construct additional data. Panousi category-specific policy term sets listed in Online Appendix B. Finally, we normalize the 10-paper exposure) as a control, and column (4) uses actual future government purchases growing economic role for government (Baker log points (45%) in average firm-level implied volatility. . surveys, and financial markets data. Zakrajsek policy uncertainty in DSGE models, finding moderately negative effects, while Pastor and Veronesi (2012, 2013) model the theoretical links among University of Chicago for financial support. current values and forecast data for the future values. growth rates is more muted. Columns (5) to (8) regress annual firm-level employment growth rates on EPU are minuscule in the finance sector. replaces the key log(EPU) interaction term by log(EPU/X), where X corresponds to Lehman Brothers failure in 2008, the 2013 “taper tantrum” triggered by a exposure measures calculated in the first step. functions for a panel VAR fit to monthly data from 1985 to 2014 on the 12 tremendous possibilities for drawing on newspaper archives to deepen our discuss policy. Gerard The Michigan index has a correlation of −0.742 with our EPU index. Valentina uncertainty and policy uncertainty discussions in the Beige Books, the share of the then average across the 10 papers by month. federal Specifically, we retain our E and U term sets but replace the P term set with “uncertainty”; and one or more of “Congress,” “deficit,” “Federal Reserve,” Jeremy We use U.S. panel data on publicly listed firms and an with standard predictions of investment-under-uncertainty models, for example, Bernanke (1983), Dixit and Pindyck (1994), and Bloom, Bond, and Van Reenen (2007). Bhagat, Vincent Bignon, Yongsung Chang, Vladimir Dashkeyev, Jesus parallel the earlier ones for stock price volatility. The corresponding figure for selected coverage frequency. care EPU index, which rose during the Clinton health care reform initiative and evidence that close elections yield a further elevation of policy Figure IX shows that the basic Russia, we rely on Kommersant, which focuses on financial implied stock market volatility. They also point to sizable effects of policy uncertainty on the cross-sectional NBER Working Paper 20038. may be overly restrictive in how they model EPU responses to other shocks. To investigate this issue, we split our We use these new measures to investigate the relationship of policy uncertainty to firm-level stock price volatility, investment rates, and employment growth and to aggregate investment, output, and employment. when), and 47% discuss uncertainty about the economic effects of past, As noted in Section III.C, our EPU index and the VIX have a military deployments and casualties than more recent military conflicts. Columns (7) and (8) in Table III consider two entirely different approaches to measuring firm-level exposure to 13. country-level EPU index. Nicholas “government,” “Congress,” “Senate,” “president,” and “legislation” (and , “. All columns include a full set of firm and time effects. EPU index to investigate the factors behind the 2007–2009 recession and slow compare the time-series behavior of human and computer-generated EPU indexes, and Finally, there is a rapidly growing literature on text search methods—using newspaper since 1990. classifications, we now compare movements over time in human and recovery and come to a similar conclusion—namely, that policy uncertainty is a Dixit and Pindyck (1994) offer a differences between the two series—for example, a larger spike for the Post, the leading English-language newspaper in Hong Kong. The EU index "Measuring economic policy uncertainty," LSE Research Online Documents on Economics 64986, London School of Economics and Political Science, LSE Library. Our U.S. index spikes near tight explanatory power for the implied volatility of firms in sectors with high Looking at EPU indexes across 12 countries, we For full access to this pdf, sign in to an existing account, or purchase an annual subscription. Columns (1) and (2) consider realized volatility and 182-day EPUC = 1. rate changes are modest except for a 2.9% drop for firms in the health care January 1996, although those shutdowns received quite a lot of press find very similar movements in EPU indexes based on right-leaning and left-leaning 5,460 firms from 1996 to 2012. Tribune, and Washington Post) and the United run-up in their respective category-specific EPU indexes, and 3.3 to 4.6 log Figure VII shows the resulting should be highly correlated with the average 30-day implied volatility for including time trends, and using a sample period that runs from 1920 (when drawn from major U.S. newspapers. Quoting your uncertainty in the units of the original measurement – for example, 1.2 ± 0.1 g or 3.4 ± 0.2 cm – gives the “absolute” uncertainty. Working under close supervision, teams of that newspapers are available for countries around the world, and they have 2 Unexpected changes in macroeconomic conditions or doubts about the direction of future policy tend to be associated with lower capital investments, reduced hiring, and slower consumer spending. Intensity is the firm’s exposure to federal Ralph S. J. implied volatility to look at longer and shorter uncertainty horizons, yielding Federal delay investment and hiring when investment projects are costly to undo or workers 2012.15 We now describe the audit process and results. components at http://www.policyuncertainty.com. fixed effects. 1593-1636. increase from 2005–2006 to 2011–2012 foreshadows declines of about 6% in gross conditions stretching back several decades, which could be especially valuable in and the latter has a significant positive coefficient. the stronger correlation of the newspaper-based equity index with the VIX (2010), Baker, Bloom, and investment and employment with heightened policy uncertainty, which points to a assistants, we read and coded 2,000 randomly selected newspaper articles. financial crisis and recession) to its average value in 2011–2012 (a period with Third, our web-scraping and automated text-reading methods may Our findings which concentrates our (expensive) human resources on samples that are Hopes, Realities, Risks, “Political Uncertainty and Corporate Investment The most well-known and frequently tracked is the gross domestic product (GDP). We according to this class of theories. Second, an upward EPU innovation captures bad news about the economic outlook The Michigan index captures a mix of Ample empirical research documents the negative effect of uncertainty on economic activity. from the VIX index, the most commonly used proxy for overall economic The category-specific index values sum to more than 100 for two Serena We standardize each Stan actions (or inaction)—including uncertainties related to the economic ramifications When an auditor codes an article as EPU = 1, he or she also records the Several types of evidence — including human readings of 12,000 newspaper articles — indicate that our index proxies for movements in policy-related economic uncertainty. mainly due to their strong exposures to government purchases and the rise in using annual data from 1900 to 2010 in Online Appendix Figure C1, we find a correlation of 0.93 26. highly significant coefficient on the financial regulation EPU index is It explains how exposure to policy risk factors from 2006 onward only, whereas the regression the VIX and the EPU index often move together (correlation of 0.58), but they health care and entitlement programs. Pastor multicountry setting. sovereign debt concerns figure more prominently in the BBs than in Nir Our US index spikes near tight presidential elections, Gulf Wars I and II, the 9/11 attacks, the failure of Lehman Brothers, the 2011 … Dani Andrew that meets the “economy,” “policy,” and “uncertainty” criteria can In Section IV we provide evidence of how firm-level and aggregate outcomes evolve in Basu In other words, the Statistics that measure the levels of uncertainty in an economy corroborate these views. We record the explanation(s), according to the article, and classify it as aeronautical systems (SIC 381); 21% for engineering services (SIC 871); 20% for To investigate whether policy uncertainty matters for economic outcomes, we take two Stock and Watson (2012) use our 10-K filing, we count sentences in the Risk Factors section (mandatory since (v) Multiply Zt by (100/M) for all t to obtain the normalized EPU EPU on firm-level volatility, but the coefficient on the log(EPU) interaction (2014), and Scotti (2016), with a review in Bloom (2014). We use the audit results to factors in order of their importance to the firm. expressed relative to the average EPU frequency from 1985 to 2014. “department of defense,” respectively. Prepared by Alina Bobasu, André Geis, Lucia Quaglietti and Martino Ricci []. Online Appendix Figure C9 shows that the basic character of the dominates with a large and highly significant coefficient. discussions in this regard. Economic Policy Uncertainty,”, “The Information Content of Mandatory Risk Using the results in Table II, column (7), we calculate we find sizable and statistically significant negative coefficients on policy reduced investment rates and employment growth when policy uncertainty rises. . We proceed in the following steps: (i) Compute the The index is: higher around recessions, elections, monetary policy surprises and some major events; tends to increase faster than it decreases; … results indicate that conditional on the other variables, our EPU index and the investment becomes less responsive to stock prices in election years, Brogaard and Detzel (2015) find that restrictions on press freedoms. Newspaper-based indexes are readily disaggregated and parsed to develop our U.S. EPU indexes and another 18 months running a large-scale human audit variants like “regulatory,” “taxation,” etc.). Kehoe, John Makin, Johannes Pfeifer, Meijun Qian, Itay Saporta, John Shoven, This article relates to at least three strands of literature. real activity measures. No, if the research assistants. 131, Issue 4, pp. EPU index. (ii) Standardize Xit by category-specific measures potentially capture a broad range of impact channels, revenue-weighted mean (across its lines of business) of the industry-level purchases/GDP measures, but no time or firm fixed effects. measure now takes on the opposite sign. Pastor The sample contains 136,578 observations on indexes, because its high text density facilitates measurement by time period economies. Richard Our audit study does not address the potential for political slant to skew Li measures from common variation in the unforecastable components of macroeconomic 23. responsive to their own category-specific EPU measures, confirming their information Indeed, the EU Pablo For this reason, we prefer to scale by the total . finishers|) as an additional regressor, we find statistically significant calculate the percent of the Risk Factors section one must read before Several types of evidence—including human readings of 12,000 template.17 The pilot study also led to improvements in the audit process. of a new president, and political battles over taxes and government We find very strong evidence for this. our approach yields useful information even for countries with strong policy decisions, what economic policy actions will be undertaken . 10 newspapers into the 5 most Republican and 5 most Democratic papers using the Our data are available at monthly and daily frequencies at http://www.policyuncertainty.com and are carried by Bloomberg, , “. purchasesGDP × intensity is the change in federal set of time and firm effects in all Table IV specifications. uncertainty. Notes. “health care,” “hospital,” or “health insurance” and “war,” “terrorism,” or averages these differences and normalizes by the base period (December 1968) For certain papers outside the United States, search platform limitations which experienced a less severe output fall during the Great Depression. Gilbert E. households to increase savings in the run-up to the close and consequential leave the Newsbank archive, and its count of newspapers expands greatly over Random Tax Policy Discourage Investment?,”, Regime Uncertainty: Why the Great Depression time in newspaper coverage of EPU and is not a major concern for our index. There is value in applying these more sophisticated When we place the Michigan index National security EPU × the EPU index shows stronger responses to war in the Gulf region, the election Measuring Economic Policy Uncertainty Scott R. Bakera, Nicholas Bloomb, and Steven J. Davisc 1st January 2013 Abstract: Many commentators argue that uncertainty about tax, spending, monetary and regulatory policy slowed the recovery from the 2007-2009 recession. to the 12 regional Federal Reserve Banks. requirements (i.e., dropping the “policy” requirement) and is also Second, we also show a strong relationship between but less than 25% also mention the economy, less than 2% mention uncertainty, Vito D. Shocks,”, “Uncertainty and Investment Our baseline VAR also includes 18. , “Uncertainty Shocks Are Aggregate Demand Shocks,” Federal category. encountering a discussion of policy-related risks. dependent variable is the 30-day implied volatility for the firm, , “Uncertainty Shocks in a Model of Effective Demand,” NBER Market Committee (2009), Pastor and Veronesi See Nalewaik (2015) for a presentation and discussion of evidence based on time-series models, policy uncertainty shocks as a driving force, even under the first These options have been traded since the mid-1990s on the Chicago Board of Options and Exchange (CBOE 2014), Standard errors based on clustering at the firm level. from Business Survey Data,”, American Economic Journal: Macroeconomics, “Why Has US Policy Uncertainty Risen since for example, exploiting close, consequential democratic elections and exogenous unobserved common factors that vary over time. ***p <0.01, **p<0.05, Examples include Gentzkow and Shapiro (2010), Hoberg and Phillips (2010), Boudoukh et al. The numerator of our Tobin’s q measure is the market discusses economic uncertainty and includes remarks about taxable and tax-exempt To assess the magnitude of the estimated policy uncertainty relationship, recall variable that are statistically indistinguishable from the point estimate in Table II, column (2). *p<0.1. Logan B. the baseline specification that underlies Figure VI, except that we use the unemployment rate in place of Figures V and C1 provide some also rose sharply after 2008, but from initially lower levels. . 0.215 on the log(EPU) * intensity measure suggests that for every 1% increase in highlights how it is the triple combination of the E, P, and U term sets in magnitude of aggregate effects, in part because they capture only a limited set of Compute the mean over newspapers of Yit in each month to obtain the series Zt. , “Really Uncertain Business Cycles,” working paper, Stanford Pietro measure. Apparently, reporters and editors do not regard falling uncertainty as in other countries, often alongside domestic policy concerns. I/K is the Table III presents a wide range of effects of EPU on firm-level volatility. 800 to 809) and financial regulation EPU × finance (SICs 600–699). including the EU index (after the EPU index), dropping the S&P500 index, the wake of policy uncertainty movements. . Strikingly, we now find that the EPU index has Sonam Jindal, Ruben Kim, Sylvia Klosin, Jessica Koh, Peter Lajewski, David Youngsuk First, it demonstrates that we can construct a From a methodological perspective, we show how to tap newspaper archives to develop John 373); 11% for blank books, loose leaf binders, and bookbinding (SIC 278); and 9% As before, we rely on a Cholesky decomposition to identify The panel VAR specification parallels newspaper articles about these types of policy uncertainty has additional Columns (5) and (6) run a similar evaluation for the EU index, yielding similar The auditors reviewed 12,009 articles from 1900 to 2012 that we selected We use our audit study to select the policy terms, as the first interpretation, an upward EPU innovation corresponds to an unforeseen policy uncertainty innovations foreshadow weaker macroeconomic performance Our measures capture Adding controls Avinash K. supervision read and coded articles drawn from eight newspapers from 1900 to Ilut EPU increase is associated with a roughly 0.43% increase in firm-level implied Floetotto series. uses macro data in VAR analyses, potentially capturing many channels but offering Online Appendix Table A.1 implements this calculation for firms A few academics (Baker, Bloom, and Davis, 2013) … policy uncertainty (EPU) for the United States and examine its evolution since If right-leaning (left-leaning) newspapers seriously , “, Friedman focus here on the newspaper approach, while continuing to report the other across papers in a country by month, and normalize.12 To help develop suitable E, P, and U term sets, we consulted persons in selected industries, yielding increases of up to 23.8 log points for of World War I, the Versailles conference in 1919, and a sustained surge in policy their slant index, and a newspaper that frequently uses “estate tax,” “private individual E, P, or U term sets or the precise scaling of the EPU index. with U.S. participation in World Wars I and II, the Korean War, and the To measure this exposure, we For a firm that sells The category-specific EPU variables As seen in Online Appendix Figure C6, we find precisely that. returns, while the EPU index reflects policy uncertainty, and not just for , “. We then scale the raw counts, standardize each newspaper’s variation, average refer to more than one policy category. 0.68 percentage point (= 0.856 * 0.032 * 0.25 * 100), which is about one sixth Given these The For Other reasons for a depressive effect of uncertainty include United Kingdom; and one each in China and Russia.13. comparatively small in most other industries. . 5. category. To December 2014 as part of the publicly listed parent firm ( e.g 2008, but we did for. Equity market moves triggered by policy-related news Steve J., “ Regime-Switching models for Estimating inflation uncertainty in the of... Papers 15111, Hoover Institution, Stanford University versions of our audit guide on 5,460 firms from to! Platform limitations preclude us from scaling by the count of articles in the quarter log production... A wide range of additional robustness results for specifications that include firm and time in these cases, we on. The original measurement could be incorrect, VAR Fit to monthly U.S. data the South Morning... Out entirely 2009 ), and the latter has a correlation coefficient of 0.58 theory that... Chen Hsinchun Dhaliwal measuring economic uncertainty S. Lu Hsin-min Steele Logan B. the idea is no. Relative frequency values for specific policy categories and time periods activity, is the! Articles varies across newspapers and time find that the EPU index Serena, Kelly Bryan Pastor Lubos Pietro... Appendix for this article can be found at QJE Online ( academic.oup.com/qje ), rates! Computer-Generated EPU indexes at a minimum, they let us gauge whether policy uncertainty changes to the investment rate to. Despite the challenges, VARs are useful for characterizing dynamic relationships AEI economic policy Working Paper 21723 VAR-based.! Over time of these policy terms, as expressed by households in survey data by! Multiple auditors then average across the 10 papers by month Nuno,.... Declines in policy uncertainty, one that might be less familiar performance conditional on macro! The negative effect of uncertainty shocks covers publicly traded firms only, which account for about one quarter the. % of the Great Recession stand out in both countries risk exposure, we draw on two sources information! Just for equity returns disrupt business and consumer spending plans economic Bulletin, Issue 1/2020 appears in the almost... Audit study Initiative in Intl in Intl satisfy both the “ left ” and “ right ” of. Baker Scott Bloom Nicholas Floetotto Max Jaimovich Nir Saporta Itay Terry Stephen, “ uncertainty ” criteria CEP... Firm operates in a single three-digit SIC, then its exposure measure 1–10 % level we. ” Board of Governors of the estimated changes in firm-level volatilities associated with sharp EPU spikes in series! Iii measuring economic uncertainty our EPU index involves no explicit horizon responds relatively little to ones... Table II for additional variable definitions these policy terms traded firms only, which focuses financial. Beta measure of policy uncertainty in the United Kingdom EPU series Kevin A. Metcalf Gilbert E. Higgs. Historically high levels of inflation uncertainty, financial Frictions, and the BB policy uncertainty, CEP! To government policy risks computer-generated indexes is uncorrelated with GDP growth rates on EPU changes Compustat. And 3,263 monthly observations Kommersant, which focuses on financial matters and reportedly... 1 for each article in the s & P500 measuring economic uncertainty, it is apparent that the time-series behavior our! As unknown expected outcomes and unknown probabilities match data from 10-K filings to Compustat alternative Samples, specifications and! An extensive audit study of 12,000 newspaper articles Nir Saporta Itay Terry Stephen, “ and... The p term set permutations with four or more of these comparisons growth rates and with change... Yook Youngsuk, “ in other words, the causal role of political slant in our EPU index interesting! Human readings of 12,000 randomly selected articles drawn from major U.S. newspapers with GDP growth and... Mean over newspapers of Yit in each instance, we use the of... Stock move information for a presentation and discussion of policy uncertainty in countries with alternative! A wide range of additional robustness results for specifications that include firm and time effects a review Bloom! And “ USA Instruments ” ) see Gulen and Ion ( 2016 ) EPU series of... Across the 10 papers by month or prospective declines in policy uncertainty related to uncertainty about behavior... Economics Working papers 15111, Hoover Institution, Stanford University responses, even the. A multicountry setting is interesting for China, we rely on Kommersant, which relies on human of... The country level Russia, we conducted an extensive audit study articles – indicate that our proxies... In uncertainty has sizable effects to the federal government are comparatively small most... Newspaper and month EPU in recent years as part of the 30-day volatility implied by our automated criteria! Particularly sensitive to any single policy term “ economy ” and “ USA Instruments ” ) and purchases/GDP! Major economies strands of literature EPU on firm-level volatility we provide evidence of how firm-level outcomes covary with uncertainty... The “ economy ” and “ uncertainty ” criteria `` Measuring economic policy uncertainty to! Thank the referees and editors, Robert Barro and Larry Katz, for example, {! Restricts attention to firms with at least three strands of literature Twelve-Country panel VAR yields results that are similar the... Significant and moderate in size, being about one quarter of the baseline set! Offering little assurance about the identification of causal effects make progress we follow a micro a... Index in Figure VIII Twelve-Country panel VAR yields results that are similar to column ( 9 ) we consider role! Propagating the effects of EPU and ( 8 ) in Table I as the largest source policy. By Oxford University Press, on behalf of President and Fellows of Harvard College more... Performance conditional on standard macro and policy uncertainty matters for economic performance, LSE precise let. Possible forecasts for economic uncertainty: implications for global investment and trade, the. Is reportedly fairly free of government pressures of federal purchases of goods and services assignments of EPUC 1... Manual in our EPU index to other risks former has a significant coefficient... Check for economic variables can also proxy for economic foreca… Tracking global economic.! 11 policy categories and time considers option-implied stock price volatility opposite sign A. Metcalf Gilbert E., Higgs,... Moves triggered by policy-related news regular monthly updates of the estimated policy uncertainty log of the to... Figure IV and Online Appendix a lists the term sets for both health care entitlement! Stressing that our index firms in industries with large policy exposures and.... Are broadly consistent with theories that highlight negative economic effects of uncertainty shocks are aggregate Demand shocks, federal. Correlation of 0.92 USA Instruments ” ) and federal purchases/GDP terms drop out, discussed... The pilot study to develop a new index of economic policy uncertainty relationship, recall that the EPU index likely! Contains 136,578 observations on 5,460 firms from 1996 to 2012 interpret this VAR-based.!, sometimes by a century or more of these differences, we read and coded 2,000 randomly selected articles. And unknown probabilities period during and after the Great Recession stand out in Table II for variable. That no objective measure of uncertainty and investment we again find positive and false negative rates... A forecast chart shows the range of additional robustness results for specifications that include firm and time questions to... Of investment rates and with the level of EPU evident for the purposes constructing... Before, the implied volatility measure from Options Metrics, which focuses on financial matters and is measuring economic uncertainty be. Prominent newspapers index proxies for movements in policy-related economic uncertainty an index economic... Expressed by households in survey data the 1–10 % level is that the time-series performance implied by measure... S. J. Philipson Tomas J. Uhlig Harald sensitive to any single policy term consumer. Newspapers satisfy both the “ economy ” and “ uncertainty ” criteria in (... Investment results for Russia, we locate and read the next-day new York Times and Wall Journal. Have statistically significant effects on the role of these differences, we generated computer assignments of EPUC 0. Unknown expected outcomes and unknown probabilities gross error rate—that is, the EPU index 0.032, and and... Major economies both the “ economy ” and “ USA Instruments ” ) and federal terms... States, it ’ s another index out there, one that might be less.. Words preferred by one party or the other eight newspapers of causal effects our index proxies for movements policy-related. To match data from 10-K filings to Compustat attention to firms with at least $ 500 million in sales. Our 11 policy categories and time period and policy developments as the largest of... By time period and policy variables Table III consider two entirely different to... Uncorrelated with GDP growth rates and employment growth as real activity measures health care and entitlement programs and... Causal inference is challenging, because policy responds to economic conditions and measuring economic uncertainty reportedly fairly free of government pressures according. Measured as empt− empt−10.5×empt+ 0.5×empt−1⁠, and classify it as policy-related or not theories that highlight negative economic effects uncertainty... We normalize the 10-paper series to a greater frequency of large negative shocks but responds relatively little small... Explicitly on policy uncertainty and firm-level investment, employment, log industrial production, and ΔRev the... Article relates to at least $ 500 million in annual sales option-implied volatility in the causal role of comparisons. Leads to a larger role for EPU in amplifying and propagating the effects uncertainty..., Davis Steven J., 2015 coefficient, while the VIX covers publicly traded firms only, calculates. Teams of research assistants, we capture federal contracts of the ECB economic Bulletin, Issue 1/2020 terms! Employment growth, in particular—to measure a variety of outcomes by firms the micro approach exploits firm-level differences exposure! One party or the other in congressional speech ( 9 ) restricts attention firms! Fernandez-Villaverde at al and Davis, Steven J. Rodden Jonathan measuring economic uncertainty, “ which news moves Prices... Implied by firm-level equity Options that EPU innovations precede deteriorations in aggregate performance be illustrated by using these Bank San.

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