Economic Policy Uncertainty: A Review on Applications and Measurement Methods with Focus on Text Mining Methods

TL;DR

This paper reviews methods for measuring Economic Policy Uncertainty (EPU), emphasizing text mining techniques that analyze news and financial sources, and discusses future research directions in this field.

Contribution

It provides a comprehensive survey of EPU measurement methods, categorizes them based on input data, and highlights the prominence of text mining approaches in capturing uncertainty.

Findings

Text mining methods dominate EPU measurement.

EPU influences economic indicators like investments and unemployment.

The paper proposes future research directions in textual EPU measurement.

Abstract

Economic Policy Uncertainty (EPU) represents the uncertainty realized by the investors during economic policy alterations. EPU is a critical indicator in economic studies to predict future investments, the unemployment rate, and recessions. EPU values can be estimated based on financial parameters directly or implied uncertainty indirectly using the text mining methods. Although EPU is a well-studied topic within the economy, the methods utilized to measure it are understudied. In this article, we define the EPU briefly and review the methods used to measure the EPU, and survey the areas influenced by the changes in EPU level. We divide the EPU measurement methods into three major groups with respect to their input data. Examples of each group of methods are enlisted, and the pros and cons of the groups are discussed. Among the EPU measures, text mining-based ones are dominantly studied. These methods measure the realized uncertainty by taking into account the uncertainty represented in the news and publicly available sources of financial information. Finally, we survey the research areas that rely on measuring the EPU index with the hope that studying the impacts of uncertainty would attract further attention of researchers from various research fields. In addition, we propose a list of future research approaches focusing on measuring EPU using textual material.