Measuring Economic Policy Uncertainty

48 Pages Posted: 9 Jan 2013  

Scott R. Baker

Northwestern University, Kellogg School of Management, Department of Finance

Nicholas Bloom

Stanford University - Department of Economics; London School of Economics - Centre for Economic Performance (CEP); National Bureau of Economic Research (NBER)

Steven J. Davis

University of Chicago; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: January 1, 2013

Abstract

Many commentators argue that uncertainty about tax, spending, monetary and regulatory policy slowed the recovery from the 2007-2009 recession. To investigate this we develop a new index of economic policy uncertainty (EPU), built on three components: the frequency of newspaper references to economic policy uncertainty, the number of federal tax code provisions set to expire, and the extent of forecaster disagreement over future inflation and government purchases. This EPU index spikes near consequential presidential elections and major events such as the Gulf wars and the 9/11 attack. It also rises steeply from 2008 onward. We then evaluate our EPU index, first on a sample of 3,500 human audited news articles, and second against other measures of policy uncertainty, with these suggesting our EPU index is a good proxy for actual economic policy uncertainty. Drilling down into our index we find that the post-2008 increase was driven mainly by tax, spending and healthcare policy uncertainty. Finally, VAR estimates show that an innovation in policy uncertainty equal to the increase from 2006 to 2011 foreshadows declines of up to 2.3% in GDP and 2.3 million in employment.

Keywords: economic uncertainty, policy unvertainty, business cycles

JEL Classification: D80, E22, E66, G18, L50

Suggested Citation

Baker, Scott R. and Bloom, Nicholas and Davis, Steven J., Measuring Economic Policy Uncertainty (January 1, 2013). Chicago Booth Research Paper No. 13-02. Available at SSRN: https://ssrn.com/abstract=2198490 or http://dx.doi.org/10.2139/ssrn.2198490

Scott R. Baker

Northwestern University, Kellogg School of Management, Department of Finance ( email )

Evanston, IL 60208
United States

Nicholas Bloom

Stanford University - Department of Economics ( email )

Landau Economics Building, Room 231
579 Serra Mall
Stanford, CA 94305-6072
United States
650-725-7836 (Phone)

HOME PAGE: http://economics.stanford.edu/faculty/bloom

London School of Economics - Centre for Economic Performance (CEP) ( email )

Houghton Street
London WC2A 2AE
United Kingdom
+44 20 7955 7408 (Phone)

HOME PAGE: http://cep.lse.ac.uk/people/bio.asp?id=1498

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Steven J. Davis (Contact Author)

University of Chicago ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-7312 (Phone)
773-702-0458 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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