Uncovering Economic Policy Uncertainty During Conflict

• Authors: Christopher Rauh, Sophie Brochet and Hannes Mueller.
• BSE Working Paper: 1503 | July 25
• Keywords: armed conflict , Measurement Bias , Text-Based Indices , Macroeconomic uncertainty
• JEL codes: C43, D80, E32, F51, H56

The correct measurement of economic policy uncertainty (EPU) plays a critical role in many policy settings -in particular where economic policy decisions need to be taken in response to large shocks. One such large shock is armed conflict. But, counterintuitively, the standard text-based EPU index systematically declines during armed conflict periods. Using a global news corpus covering 192 countries and over 5 million articles, we show that this decline is driven not by reduced uncertainty, but by a crowding out of reporting on economics and policy. We show that a combination of topic modeling and two-way fixed effects can be used to adjust the measurement of EPU, providing a new view on political risk during armed conflict. After adjustment, the EPU aligns more closely with firm perceptions, political risk insurance and investment during armed conflict.