Business cycle observers have long noted a connection between upheavals—be they manmade or natural—and economic instability. Stock market volatility has traditionally stood in as a proxy for this free-floating anxiety. But in recent years some economists have argued that the metric fails to capture how the average individual ascertains the state of the economy. Working with Stanford economics professor Nicholas Bloom and Steven J. Davis of the University of Chicago Booth School of Business, graduate student Scott R. Baker, MA '12, devised an index of fiscal policy-related unease based on the frequency with which newspapers use the word "uncertainty" and its synonyms in conjunction with references such as legislation, the White House or the Federal Reserve. The index shows an uptick in uncertainty coinciding with the 2007-09 recession, and historic highs corresponding to the Lehman bankruptcy, TARP legislation and debt ceiling debate. Extending the index back to 1900 reveals similar spikes around events such as World War I, the Great Depression and the Watergate scandal.
FARM REPORT
There's More Than One Way to Measure Economic Jitters
A new index uses newspapers' word choices.
September/October 2013Reading time min
Data: Courtesy Scott R. Baker