Measuring Economic Policy Uncertainty

We develop a new index of economic policy uncertainty (EPU) based on newspaper coverage frequency.Several types of evidence -including human readings of 12,000 newspaper articles -indicate that our index proxies for movements in policy-related economic uncertainty.Our US index spikes near tight presidential elections, Gulf Wars I and II, the 9/11 attacks, the failure of Lehman Brothers, the 2011 debt-ceiling dispute and other major battles over fiscal policy.Using firm-level data, we find that policy uncertainty raises stock price volatility and reduces investment and employment in policy-sensitive sectors like defense, healthcare, and infrastructure construction.At the macro level, policy uncertainty innovations foreshadow declines in investment, output, and employment in the United States and, in a panel VAR setting, for 12 major economies.Extending our US index back to 1900, EPU rose dramatically in the 1930s (from late 1931) and has drifted upwards since the 1960s.