Economic Policy Uncertainty in the Euro Area: An Unsupervised Machine Learning Approach

47 Pages Posted: 10 Jan 2020

See all articles by Andres Azqueta-Gavaldon

Andres Azqueta-Gavaldon

Dominik Hirschbühl

European Commission - Joint Research Centre

Luca Onorante

Joint Research Centre, Italy

Lorena Saiz

European Central Bank (ECB); University of Oxford

Date Written: January, 2020

Abstract

We model economic policy uncertainty (EPU) in the four largest euro area countries by applying machine learning techniques to news articles. The unsupervised machine learning algorithm used makes it possible to retrieve the individual components of overall EPU endogenously for a wide range of languages. The uncertainty indices computed from January 2000 to May 2019 capture episodes of regulatory change, trade tensions and financial stress. In an evaluation exercise, we use a structural vector autoregression model to study the relationship between different sources of uncertainty and investment in machinery and equipment as a proxy for business investment. We document strong heterogeneity and asymmetries in the relationship between investment and uncertainty across and within countries. For example, while investment in France, Italy and Spain reacts strongly to political uncertainty shocks, in Germany investment is more sensitive to trade uncertainty shocks.

Keywords: economic policy uncertainty, Europe, machine learning, textual-data

JEL Classification: C80, D80, E22, E66, G18, G31

Suggested Citation

Azqueta-Gavaldon, Andres and Hirschbühl, Dominik and Onorante, Luca and Saiz, Lorena, Economic Policy Uncertainty in the Euro Area: An Unsupervised Machine Learning Approach (January, 2020). Available at SSRN: https://ssrn.com/abstract=3516756 or http://dx.doi.org/10.2139/ssrn.3516756

Dominik Hirschbühl

European Commission - Joint Research Centre

Joint Research Centre, European Commission, Rue du
Ispra, Varese 21027
Italy

Luca Onorante

Joint Research Centre, Italy

Via E. Fermi 1
I-21020 Ispra (VA)
United States

Lorena Saiz

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

University of Oxford ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom

No contact information is available for Andres Azqueta-Gavaldon

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