PARTICIPANTS
Steve Davis, Elena Afanasyeva, Nick Bloom, John Cochrane, John Cogan, John Gunn, Bob Hall, Tim Kane, Patrick Kehoe, Dan Kessler, Stephen Langlois, David Mauler, Elena Pastorino, John Raisian, Josh Rauh, George Shultz, John Taylor, Yevgeniy Teryoshin, Neil Irwin, Pavel Krivenko

ISSUES DISCUSSED
Steven Davis, the William H. Abbott Professor of International Business and Economics at the University of Chicago’s Booth School of Business and Visiting Fellow at the Hoover Institution, presented his work (joint with Scott Baker and Nick Bloom) on “Policy Uncertainty and Economic Performance.”

Davis first described the construction of a novel measure for policy-related economic uncertainty which he and co-authors term the Economic Policy Uncertainty (EPU) index. For 10 major US newspapers, computer programs gathered monthly counts of articles containing at least one word from each of the three term sets: “economic” or “economy”, “regulation” or “deficit” or “federal reserve” or “congress” or “legislation” or “white house”, and “uncertain” or “uncertainty.” After appropriate normalization and averaging, monthly counts can be aggregated into a U.S. monthly EPU index. The resulting series is extremely volatile, with spikes lining up nicely with historical episodes such as the recent debt ceiling debate. Similar indexes were also calculated for 12 other countries.

Davis continued by describing the evaluation process for the EPU measure. A team of research assistants audited 12,000 randomly selected articles, verifying that the EPU index is indeed an appropriate proxy for movements in policy-related economic uncertainty. He also noted that a number of large financial institutions, policy organizations, and data providers use the EPU index, suggestive of it having information value.

Concluding, Davis discussed evidence regarding effects of economic policy uncertainty. Exploiting differences across firms in exposure to policy uncertainty, Davis and coauthors find statistically significant effects of EPU on firm-level stock-price volatility, hiring, and investment. On a macro level—using a VAR framework—positive EPU innovations foreshadow lower investment, output, and employment.