US Monthly Index
To measure policy-related economic uncertainty, we construct an index from three types of underlying components. One component quantifies newspaper coverage of policy-related economic uncertainty. A second component reflects the number of federal tax code provisions set to expire in future years. The third component uses disagreement among economic forecasters as a proxy for uncertainty.
News Coverage about Policy-related Economic Uncertainty
Our first component is an index of search results from 10 large newspapers. The newspapers included in our index are USA Today, the Miami Herald, the Chicago Tribune, the Washington Post, the Los Angeles Times, the Boston Globe, the San Francisco Chronicle, the Dallas Morning News, the Houston Chronicle, and the Wall Street Journal. To construct the index, we perform month-by-month searches of each paper, starting in January of 1985, for terms related to economic and policy uncertainty. In particular, we search for articles containing the term 'uncertainty' or 'uncertain', the terms 'economic' or 'economy' and one or more of the following terms: 'congress', 'legislation', 'white house', 'regulation', 'federal reserve', or 'deficit'. In other words, to meet our criteria for inclusion the article must include terms in all three categories pertaining to uncertainty, the economy and policy.
To deal with changes over time in the volume of articles for a given paper, we divide the raw count of policy uncertainty articles by the total number of articles in the same paper and month. We then normalize the resulting series for each paper to have a unit standard deviation from January 1985 through December 2009. Next, we sum the normalized values over papers in each month to obtain a multi-paper index. Finally, we re-normalize the multi-paper index to an average value of 100 from January 1985 through December 2009.
Tax Code Expiration Data
The second component of our index draws on reports by the Congressional Budget Office (CBO) that compile lists of temporary federal tax code provisions. Temporary tax measures are a source of uncertainty for businesses and households because Congress often extends them at the last minute, undermining stability in and certainty about the tax code.
The CBO reports contain data on scheduled expirations of federal tax code provisions in the contemporaneous calendar year and each of the following 10 years. We calculate the total dollar amount of expirations for each year into the future and apply a simple weighting to these data in January of each year, multiplying expirations by 0.5^((T+1)/12) for T equal to the number of months in the future when the tax code provision expires. This weighting formula corresponds to an annual discount rate of 100 percent. We then sum the discounted number of tax code expirations to obtain an index value for each January, which we then hold constant during the calendar year. We utilize a high discount rate because many expiring tax code provisions are regularly renewed, and are unlikely to be a major source of uncertainty until the expiration date looms near.
Economic Forecaster Disagreement
The third component of our policy-related uncertainty index draws on the Federal Reserve Bank of Philadelphia's Survey of Professional Forecasters. This quarterly survey covers a wide range of macroeconomic variables. We utilize the individual-level data for three of the forecast variables, the consumer price index (CPI), purchase of goods and services by state and local governments, and purchases of goods and services by the federal government. For each series, we look at the quarterly forecasts for one year in the future. We chose these variables because they are directly influenced by monetary policy and fiscal policy actions. We treat the dispersion in the forecasts of these variables as proxies for uncertainty about monetary policy and about government purchases of goods and services at the federal level. This approach builds on a long literature using disagreement among forecasters as a proxy for economic uncertainty.
For inflation, we look at the individual forecasts for the quarterly inflation rates four quarters in the future as measured by the CPI. To construct the dispersion component, we then take the interquartile range of each set of inflation rate forecasts in each quarter.
For both federal and state/local government purchases, we divide the interquartile range of four-quarter-ahead forecasts by the median four-quarter-ahead forecast and multiply that quantity by a 5-year backward-looking moving average for the ratio of nominal purchases, either federal or state/local, to nominal GDP. We hold the values of the forecaster disagreement measures constant within each calendar quarter. Finally, we sum the two indices, weighted by their nominal sizes, to construct a single federal/state/local index. Due to delays in the release of this data, we set each quarter's data forward one month. That is, when Quarter 3 data is released, it will be applied to August, September, and October instead of July, August, and September.
Constructing our overall policy-related economic uncertainty index
To construct our overall index of policy-related economy uncertainty, we first normalize each component by its own standard deviation prior to January 2012. We then compute the average value of the components, using weights of 1/2 on our broad news-based policy uncertainty index and 1/6 on each of our other three measures (the tax expirations index, the CPI forecast disagreement measure, and the federal/state/local purchases disagreement measure).