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Sources of Economic Policy Uncertainty in the euro area

Author

Listed:
  • Azqueta-Gavaldón, Andrés
  • Hirschbühl, Dominik
  • Onorante, Luca
  • Saiz, Lorena
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).

Suggested Citation

  • Azqueta-Gavaldón, Andrés & Hirschbühl, Dominik & Onorante, Luca & Saiz, Lorena, 2023. "Sources of Economic Policy Uncertainty in the euro area," European Economic Review, Elsevier, vol. 152(C).
    • Handle: RePEc:eee:eecrev:v:152:y:2023:i:c:s0014292123000028
    DOI: 10.1016/j.euroecorev.2023.104373
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    Cited by:

    1. Liosi, Konstantina, 2023. "The sources of economic uncertainty: Evidence from eurozone markets," Journal of Multinational Financial Management, Elsevier, vol. 69(C).
    2. Azqueta-Gavaldon, Andres, 2023. "Political referenda and investment: Evidence from Scotland," European Journal of Political Economy, Elsevier, vol. 80(C).
    3. Daniel Pastorek & Dajana Mazurkova, 2023. "The Heterogeneity of European Bank Lending and the Role of Economic Policy Uncertainty," Journal of Economics / Ekonomicky casopis, Institute of Economic Research, Slovak Academy of Sciences, vol. 71(3), pages 258-278, March.
    4. Griller, Stefan & Huber, Florian & Pfarrhofer, Michael, 2024. "Financial markets and legal challenges to unconventional monetary policy," European Economic Review, Elsevier, vol. 163(C).
    5. Pastorek, Daniel, 2023. "Euro area uncertainty and Euro exchange rate volatility: Exploring the role of transnational economic policy," Finance Research Letters, Elsevier, vol. 58(PA).
    6. Wang, Zhixiao & Kong, Dongmin & Liu, Shasha, 2024. "Corporate social responsibility and firm-level systematic risk: The moderating effect of economic policy uncertainty," International Review of Financial Analysis, Elsevier, vol. 94(C).
    7. Spyridon Boikos & Eirini Makantasi & Theodore Panagiotidis, 2023. "Macroeconomic Uncertainty Indices for European Countries," Notas Económicas, Faculty of Economics, University of Coimbra, issue 57, pages 7-56, December.

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    More about this item

    Keywords

    Economic policy uncertainty; Europe; Machine learning; Latent Dirichlet Allocation; Word embeddings; Investment and consumption;
    All these keywords.

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E66 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General Outlook and Conditions
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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