This month's featured article
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.
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