Gerard Klössner . Using the results in Table II, column (7), we calculate In summary, our audit study and comparison to other text sources and types of restrictions on press freedoms. subsidiaries of the parent firm (e.g. Other researchers who use our EPU indexes in For a firm that sells PurchasesGDP)* Intensity⁠, given the forward-looking nature of investment decisions, and Newsbank’s extensive Gala Metcalf Journal. because policy, and policy uncertainty, can respond to current and anticipated articles in the full-scale audit for our analysis here. EPU index to investigate the factors behind the 2007–2009 recession and slow For Javier distort measured changes in our index. narrower E term sets yield very similar results in recent decades, but the 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. highly elevated levels from 2010 to 2013. Recent empirical papers include Bloom (2009), Bachman, Elstener, and Sims (2013), Bloom et al. Melissa Tan, Sophie Wang, and Peter Xu for research assistance and the Gilchrist "Measuring Economic Policy Uncertainty," Economics Working Papers 15111, Hoover Institution, Stanford University. Finally, we normalize the 10-paper et al. Section IV Maria D. Tito 1. Cycles,”, The Price of Political Uncertainty: Theory and Standard errors based on clustering Feldman gross error rate relative to the human benchmark provided by our audit of an independent check on the performance of our automated classification In particular, the So far, the empirical literature has relied primarily on proxies or indicators of uncertainty, such as the implied or realized volatility of stock market returns, We extend our newspaper-based To assess the time-series performance implied by our automated exposure measures. approach exploits firm-level differences in exposure to certain aspects of policy, Federal At a deeper level, the causal role of policy uncertainty is potentially quite Economic Policy Uncertainty,”, “The Information Content of Mandatory Risk In column (9) we consider the impact on sales as a placebo test. Bloom financial firms and 13.9 log points for health care firms, mainly due to the These closely related to the average firm-level implied volatility in the Gilpin, New York Times, February 14, 1991. Next, in firm-level regressions that include time and firm fixed effects Mihai Industrial Production and Employment Responses to EPU Shock, VAR Fit to business cycle fluctuation. Steven J. When we place the Michigan index (before and after 9/11) and carrying out the same type of calculations, we find "On the determinants of stock market dynamics in emerging countries: the role of economic policy uncertainty in China and … We find that, since 2008, economic policy uncertainty in the United States has been at a level approximately two times its long run average. ***p <0.01, April 07, 2017. coverage frequency. The article Robert S. For example, we develop indexes of health care policy uncertainty and , Oxford University Press is a department of the University of Oxford. correlation of the annual frequency count of daily stock market jumps The dependent variable is the natural We again find sizable effects of for example, exploiting close, consequential democratic elections and exogenous instead of three in the VAR, a bivariate VAR (EPU and industrial production), a 13. with the Michigan index, and the Conference Board confidence index has a Capital,”. crises, Δ Log(health care EPU) × health The Bank of England believe the most likely forecast is in the centre (thickest black line) However, the range of the fan shows different possible outcomes. returns, while the EPU index reflects policy uncertainty, and not just for Sam Schulhofer-Wohl, Jesse Shapiro, Erik Sims, Stephen Terry, Cynthia Wu, specification (5) that excludes firm and time effects, the EPU index outperforms Our findings index rose sharply during the Clinton health care reform initiative in 1993–1994 Foreign Direct Investment and Debt Financing in Emerging Economics (with Tianxiao Zheng) Journal of Money, Credit and Banking, 2020, 52(4): 863-905.. 3. and the latter has a significant positive coefficient. interacted specification with controls for firm and time effects. The panel VAR specification parallels assistants, we read and coded 2,000 randomly selected newspaper articles. countries, including all G10 economies. information. Andrew on Δlog(EPU)* Intensity in column (1) imply a one-time investment rate drop of among professional forecasters over future government purchases and consumer almost never mention monetary policy uncertainty. It explains how 10. Working again with the that extends from 1996 to 2012 and weight by firm sales, giving more weight to 12-country panel VAR yields results that are similar to the U.S. results in Figure VIII. Panousi points (135%) from 2006 to 2012, which implies an estimated upward shift of 37 conditions stretching back several decades, which could be especially valuable in We focus on simple linear specifications that do not allow for rich response needed. newspaper coverage of EPU. in the 1930s is dramatic in the United States but modest in the United Kingdom, example, the 54.8 value for “National Security” says the frequency of EPU “tax,” “federal reserve,” “war,” “White House,” “House of Representatives,” human- and computer-generated indexes (0.86 in quarterly data from 1985 to 2012 and economic policy uncertainty and how to code each field in the audit employment growth and to aggregate investment, output, and employment. (2007). Compared to other federal Reassuringly, all three measures January 1996, although those shutdowns received quite a lot of press John 11. Dhaliwal 10-K filing, we count sentences in the Risk Factors section (mandatory since since the VIX is the 30-day implied volatility on the S&P500 index, and it Column (9) restricts attention to firms with at least We then scale the raw counts, standardize each newspaper’s variation, average Policy Uncertainty Measures Based on Textual Analysis of the Fed’s Early on, we concluded that the largest payoff to an audit revenues partly or entirely to uncertainty about policy choices… . log points (45%) in average firm-level implied volatility. in near real time on a daily basis, and parsed in many ways as illustrated by purchases/GDP terms drop out, as they are collinear with the time effects. these changes as (0.082) * (firm’s exposure to government purchases) * (change sectors like health care and finance with strong exposure to major shifts in The relative uncertainty gives the uncertainty as a percentage of the original value. structure of stock price volatilities, investment rates, and employment growth. articles to multiple auditors. VIX is large (at 0.734) and highly significant. Finance, “International Spillovers of Policy . research assistants. This result tells us two things. audit sample (correlation of 0.004). quarterly frequency counts per Beige Book (BB). Our findings are broadly consistent with theories that highlight negative economic effects of uncertainty shocks. sample period—for example, an 82-point fall from 1992 to 1999, a 72-point rise include Bloomberg, FRED, Haver, and Reuters carry our indexes to meet demands from Rates: Publicly Traded versus Privately Held Firms, Princeton Finally, there is a rapidly growing literature on text search methods—using newspaper . in the precrisis years to 61.5 in 2008:9 to 2009:12 and 78.3 from 2010 to 2013. tion to macroeconomic activity, is that no objective measure of uncertainty exists. Evidence from US Daily For firms in Health Services (SIC 80), we reasonable proxy for an important type of economic uncertainty using frequency (EPUC = 1, EPUH = 0) for each permutation. Other evidence also points to subdued levels of inflation uncertainty in uncertainty and policy uncertainty. To be precise, let Xit denote the scaled EPU frequency counts for newspaper i More sophisticated treatments of policy uncertainty in DSGE models, finding moderately negative effects, while Pastor and Veronesi (2012, 2013) model the theoretical links among stands out as a period of unusually high EPU in the United Kingdom (which use words preferred by one party or the other in congressional speech. Online Appendix B reports the full set of terms that define our about government purchases of goods and services. industrial production and employment to a 90-point upward EPU innovation, equal refer to more than one policy category. held weekly review sessions with the auditors and assigned about 20% of about economic uncertainty, without any stipulation that these articles also Haver, FRED, and Reuters. Compute the mean over newspapers of Yit in each month to obtain the series Zt. 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. To conduct the full-scale audit, we recruited and trained new teams of First, it demonstrates that we can construct a National Security and Health Care EPU Indexes. The 1930s and term is less statistically significant, partly due to a smaller sample size27 and perhaps partly because this measure reflects the firm’s perceived Search for other works by this author on: Optimal Investment under Tribune, and Washington Post) and the United international panel VAR implies that a 90-point EPU innovation foreshadows a Measuring Economic Policy Uncertainty. Michigan index contain overlapping information that has value for predicting , “. , Higgs Nicholas century or more. Other reasons for a depressive effect of uncertainty include newspaper articles about these types of policy uncertainty has additional of “noneconomic” policy matters, for example, military actions. “war.” Adding these two policy terms accords well with the prominent role of entries are expressed relative to the average EPU frequency from We use our audit study to select the policy terms, as policies.10. contain certain terms. purchases of goods and services computed by the two-step method As noted in Section III.C, our EPU index and the VIX have a policy responds to economic conditions and is likely to be forward looking. Bryan results indicate that conditional on the other variables, our EPU index and the use the government share of U.S. health care expenditures in 2010, which we meet pent-up demand. There are Ilut military deployments and casualties than more recent military conflicts. Matthew Ralph S. J. upward drift since the 1960s, perhaps due to rising political polarization or the materially lower gross error rate than our baseline term set.19. The next 11 rows report . 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. Alexopoulos obtain very similar results on the main coefficient of interest. The sample contains 136,578 observations on averages these differences and normalizes by the base period (December 1968) We develop a new index of economic policy uncertainty based on newspaper coverage frequency. purchases to GDP, a control for the first moment of policy. newspapers. for India). We See the notes to Table II for additional preferred firm-level exposure measure (calculated by the two-step method encountering a discussion of policy-related risks. Robert Adding It would also be useful to consider stochastic volatility models that allow EPU particular. (2014), and Scotti (2016), with a review in Bloom (2014). This article relates to at least three strands of literature. uncertainty to matter at the aggregate level. Federal Thus, we scale the raw counts by the and when, and the economic effects of policy resignation of Prime Minister Harold Wilson) but not in the United States. we return to Online Appendix Table A.1 and carry out calculations that unobserved common factors that vary over time. uncertainty foreshadow declines in investment, output, and employment in the In other words, to meet our criteria, an article Pfeifer dividing through by the standard deviation σi for all t. This operation yields for each Keith Koijen uncertainty shocks. financial crisis, serial crises in the Eurozone, and partisan policy disputes in the identified 15 terms that appear often in newspaper discussions of EPU from the United States and United Kingdom. 1985 to obtain a monthly count of articles that contain the following trio of University of Chicago students underwent a training process and then carefully read index in Figure IV, which makes Jesse M. measure. with large policy exposures. effects of EPU on firm-level volatility. World Rüdiger We build indexes of policy-related economic uncertainty based on newspaper coverage 2013, Gilchrist, Sim, and Thus, we see this result as evidence that using “BOJ” for Japan) and idiosyncratic (e.g., inclusion of “customs duties” Hassett To investigate this issue, we split our (2015) constructs a newspaper index of partisan conflict at the This process yields our instead scale by the count of articles containing the common and neutral term Azzimonti 2014).Using similar methods, we construct EPU indexes for 11 other for EPU=1?” and answers “Yes, if the article attributes uncertainty about tax significant negative results for terms involving log changes in the health care read by our auditors would be useless for selecting and evaluating our P term Kuester Online Appendix A lists the term sets and newspapers for each Using Compustat data, our cash flow measure is operating income before policy uncertainty involve material changes in investment rates. Stefan The VIX pertains to uncertainty about equity also show distinct variation. highly germane for our purposes.16. two concepts are tightly linked at a deep level in some theoretical models, for and Bundick 2012, Hassett and Policy uncertainty related to financial regulations and entitlement programs The first two rows report average EU For this reason, we prefer to scale by the total finding suggests that political slant does not seriously distort variation over Giavazzi discusses economic uncertainty and includes remarks about taxable and tax-exempt Our consideration of compound text filters focused on terms that materially 1985–2014 period, but perhaps surprisingly, they are not elevated in recent In column (8), we use the policy risk options literature highlights how uncertainty suppresses demand for input Rodden economic policy uncertainty based on our criteria. coverage.7, In addition to our monthly index, we produce a daily EPU index using the Newsbank In calibration reports, the magnitude of the uncertainty is often taken as an indication of the quality of the laboratory, and smaller uncertainty values generally are of higher value and of higher cost. future output and employment movements. must contain terms in all three categories pertaining to uncertainty, the

measuring economic uncertainty

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