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Baker, Bloom and Davis
“Measuring Economic Policy Uncertainty”
Vaughan / Economics 639
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Overview of Paper
Many commentators argue that uncertainty about
taxes, government spending, and other policy matters
deepened the recession of 2007-09.
• To investigate this possibility, the authors develop a new index
of policy-related economic uncertainty.
• They then examine the potential impact of this uncertainty on
real output, investment, and employment.
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Index of Policy Uncertainty
Based on an average of three components:
• The frequency of references to economic uncertainty and
policy in the Google news media catalogue.
• The number of federal tax code provisions set to expire.
• The extent of disagreement among economic forecasters over
future federal government purchases (fiscal policy) and the
future CPI (monetary policy).
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Recent Trends in Policy Uncertainty
Policy-Related Economic Uncertainty Index
January 1985 - August 2013
250
Recession
200
Economic Policy Uncertainty Index
150
100
50
NOTE: Significant increase in
policy-related economic
uncertainty since the onset of
the Great Recession (traceable
to monetary policy and taxes).
0
Jan-85 Jan-87 Jan-89 Jan-91 Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13
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Macroeconomic Impact
Increase in policy uncertainty index equal to rise
from 2006 to 2011 is followed by:
• A peak decline in real GDP of -2.2% after four
quarters.
• A peak decline of private investment of 13% after
three quarters.
• A peak decline in aggregate employment of 2.5
million after 8 quarters.
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