RIETI Report September 2016

Murky Economic Outlook as Identified in Newspaper Articles

Many corporate executives despise government policies with no clear direction as the transparency of the economic outlook gets compromised. The economic uncertainty index for June 2016, based on newspaper articles, approached the level experienced after major political or economic events such as the 1997 Asian financial crisis, 1998 "Twisted Diet" period with different parties controlling the Upper and Lower Houses, 2008 collapse of Lehman Brothers, and 2011 debt-ceiling crisis in the United States. In the September issue of the RIETI Report, we present the column "Murky Economic Outlook as Identified in Newspaper Articles" by Fellow Arata Ito, where he examines how the level of economic transparency has been changing over the last 30 years as a result of government policies.

Ito first explains the concept of the Economic Policy Uncertainty (EPU) Project which is an index based on searches of keywords from newspaper articles to indicate the degree of monthly or daily economic uncertainty. He then discusses steps taken to improve the index, and focuses on its application to the Japanese economy by targeting certain keywords in Japanese. Ito's findings show that economic shocks cause a nation's overall economic activities to stagnate over a long period, and activities dip at most 10 months post-shock. In particular to Japan, the increase in economic uncertainty from May to June 2016 (approx. 100 points) is estimated to decrease the nation's overall economic activities over the next 12 months by 1.2% and reduce payroll employment only mildly, by 0.1%.

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Murky Economic Outlook as Identified in Newspaper Articles

ITO ArataFellow, RIETI

Many corporate executives despise government policies with no clear direction as the transparency of the economic outlook gets compromised. This article examines how the level of economic transparency has been changing over the last 30 years as a result of government policies, and posits that the current level of economic uncertainty is reaching the level previously recorded immediately after major political or economic events. The economic uncertainty index for June 2016, based on newspaper articles, approached the level experienced after the 1997 Asian financial crisis, 1998 "Twisted Diet" period with different parties controlling the Upper and Lower Houses, 2008 collapse of Lehman Brothers, and 2011 debt-ceiling crisis in the United States. According to our recent research results, this level of increased economic uncertainty could reduce the nation's overall economic activities and employment by 1.2% and 0.1% respectively over the next 12 months. This scale is equivalent to one-third of the worst level seen in economic recessions over the last 20 years.

Quantifying the degree of uncertainty based on newspaper articles

Economic uncertainty attributable to government policies cannot be directly observed, and must be measured with proxy indicators that represent it indirectly.

The Economic Policy Uncertainty Project (EPU Project), launched by University of Chicago Professor Steven J. Davis, Stanford University Professor Nick Bloom, and others, developed an index based on newspaper articles to indicate the degree of monthly or daily economic uncertainty.

Behind the approach of using newspaper articles lies the observation that, when household and corporate spending are exposed to a high level of economic uncertainty, newspapers tend to carry related articles at a substantially high frequency.

To read the full text
http://www.rieti.go.jp/en/columns/a01_0453.html

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