Economic Policy Uncertainty Index

Measuring political volatility

Three economists have done groundbreaking work utilizing the Economic Policy Uncertainty Index.

Indexing uncertainty

Below is the research abstract from 2016.

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 is associated with greater stock price volatility and reduced investment and employment in policy-sensitive sectors like defense, healthcare, finance and infrastructure construction. At the macro level, innovations in policy uncertainty 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.

Measuring volatility

The Economic Policy Uncertainty Index uses three factors to measure volatility.

  1. Quantifying coverage of policy-related economic uncertainty from 10 large newspapers;
  2. Analyzing reports by the Congressional Budget Office (CBO) that compile lists of temporary federal tax code provisions;
  3. Analyzing survey results from the Federal Reserve Bank of Philadelphia's Survey of Professional Forecasters.