Becker Friedman Institute

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Measuring Economic Policy Uncertainty

Many commentators argue that fiscal, monetary and regulatory policy uncertainty slowed the recovery from the 2007-2009 recession. To assess this view we develop a new index of economic policy uncertainty (EPU) that draws on the frequency of newspaper references to economic policy uncertainty and other indicators. Our index spikes near tight presidential elections and after the Gulf wars, the 9/11 attack, and other major events. It also rises steeply from 2008 onward. Based on a human audit of 5,000 news articles and external surveys, our EPU index appears to offer a good proxy for policy related economic uncertainty. Simple VAR models indicate the increases in policy uncertainty foreshadow weaker aggregate economic performance. Using micro-data, we investigate the impact of EPU on investment and hiring, finding large negative effects for firms heavily exposed to government spending. Extending our measurement efforts back to 1900, we find that EPU rose dramatically in the Great Recession, 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.

Scott R. Baker, Northwestern University
Nicholas Bloom, Stanford University
Steven J. Davis, University of Chicago Booth School of Business and the Hoover Institution
Publication Date: 
April, 2013
BFI Initiative: 
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