Economic Policy Uncertainty

That's life
Something that
You thought you know but didn't
Call now
Now it's your call
But nothing's for 
Keeps
--The Apartments

The graph below was pulled from a tweet that caught my eye. I have a research interest in the effects of various forms of institutional uncertainty on operating decisions. Institutional uncertainty has  assorted aliases and dimensions including regime uncertainty, regulatory uncertainty, and, in this case, policy uncertainty.

The graph plots business confidence vs a measure of policy uncertainty. It proposes that rising policy uncertainty dampens business confidence although it is difficult to see that in the graph. Policy uncertainty as measured is pictured as rising throughout the time frame shown--which is interesting in itself. However, there is no obvious corresponding downtrend in business confidence. Also, there is no discernible relationship between policy uncertainty and period of 'global slowdown' (however measured).

Frankly, most interesting to me here is how 'policy uncertainty' is  measured. The tweet cites its source as the Economic Policy Uncertainty Index which can be found here. The authors are three professors, Scott R. Baker (finance prof, Northwestern), Nick Bloom (econ prof, Stanford), Steven J. Booth (international business and econ, Chicago).

The index is constructed from three components. The first component is a normalized index of the volume of articles from 10 large newspapers discussing economic policy uncertainty. The second component is an annual dollar weighted number of tax code provisions scheduled to expire over the next 10 years (a measure of uncertainty about the future path of the federal tax code). The third component is a measure of dispersion among forecasters drawn from the Philly Fed's Survey of Professional Forecasters w.r.t. predictions about future levels of the Consumer Price Index, Federal Expenditures, and State/Local Expenditures (a measure of uncertainty about policy-related macro variables).

This is a manually intensive data series to collect, as reflected by all of the helpers involved. The US data can be downloaded here.

I plan to examine this measure more in the future.