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

Glasgow University

Dominik Hirschbühl

European Central Bank (ECB)

Luca Onorante

European Central Bank (ECB); European University Institute

Lorena Saiz

European Central Bank (ECB)

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). ECB Working Paper No. 2359, Available at SSRN: https://ssrn.com/abstract=3516756

Andres Azqueta-Gavaldon (Contact Author)

Glasgow University ( email )

Glasgow
United Kingdom

Dominik Hirschbühl

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Luca Onorante

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

European University Institute

Villa Schifanoia
133 via Bocaccio
Firenze (Florence), Tuscany 50014
Italy

Lorena Saiz

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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