Economic Policy Uncertainty: Public Data and Research

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AbstractProposal No: SES - 1324257 Institution: National Bureau of Economic Research IncNSF Program: ECONOMICSPrincipal Investigator: Bloom, NicholasTitle: Economic Policy Uncertainty: Public Data and ResearchDeep recessions and slow recoveries in the United States and Europe, accompanied by protracted fiscal crises in some countries, have spurred concerns about economic policy uncertainty. The IMF, Federal Reserve Board and European Central Bank, among many others, have raised concerns that policy uncertainty is impeding economic progress in many countries. Baker, Bloom and Davis (2013) develop a methodology to measure policy uncertainty based on: (a) disagreement amongst professional forecasters about future government spending and inflation, (b) counts of newspaper articles about policy uncertainty, and (c) scheduled expirations of tax code provisions. Data for their policy uncertainty measures are freely provided at www.policyuncertainty.com, which has more than 30,000 unique visitors since launching in January 2012. Financial firms, industrial companies, policy makers, and academic researchers now use these measures to assess policy uncertainty in several countries.This project would improve the public dataset and advance research in three directions:A)Improve the data, using more advanced computer search methods and human audits of newspaper articles to address measurement concerns. In particular, by using human readings of about 10,000 newspaper articles as a training tool for automated methods, the proposal will develop richer and more accurate news-based metrics of policy uncertainty. B)Extend the data: (i) over time, including back to 1900 for the United States; (ii) across countries, adding Brazil, China, India, Japan, Mexico and Russia; and (iii) across sectors to develop monetary, fiscal and regulatory policy uncertainty measures. Many countries appear to have heightened policy uncertainty levels since the global financial crisis of 2007-08. We would like to quantify this phenomenon in a systematic manner.C)Researching the causes and effects of policy uncertainty: Standard VAR methods show that higher economic policy uncertainty (EPU) foreshadows slower GDP growth. While suggestive, this finding does not establish a causal impact of EPU shocks ? for example, fears of an economic slowdown can itself generate greater policy uncertainty. This research will use shocks and natural experiments ? like the North Korean policy shifts, 9/11 terrorist attacks, the political cycle and wars ? to help identify the causal effects of policy uncertainty. It will also investigate EPU effects at a firm and industry level, exploiting cross-sectional differences in exposure to EPU. This project should benefit academic and business users and policymakers. On the academic front, the causes and effects of policy uncertainty is an active research area. Two barriers to research progress in this area, however, are data and identification. This project will collect and publicly provide data, and seek to identify causation by exploiting large shocks and firm-level differences in exposure to policy uncertainty.