Sources of Economic Policy Uncertainty in the euro area

Abstract

We create economic policy uncertainty (EPU) indicators for the four largest euro area countries by applying two unsupervised machine learning algorithms to news articles. The procedure allows to uncover components of EPU endogenously for the four European languages. The uncertainty indices computed from January 2000 to May 2019 capture episodes of regulatory change, trade tensions and financial stress. In an evaluation exercise, we use a structural vector autoregression model to study the effects of uncertainty on investment and on private consumption. We document considerable effects for the political and domestic regulation uncertainty components on investment, while the other types show heterogeneous effects across countries. For instance, trade uncertainty influences Germany’s investment more than its counterparts. Moreover, we observe strong negative effects of uncertainty on consumption for countries such as Italy (political) and Spain (fiscal, political and domestic regulation).