We examine the dynamic relationship between economic conditions and text-based proxies for policy uncertainty. Bad economic conditions predict higher future measures of policy uncertainty. More than 50% of the time series variation in most uncertainty proxies can be explained by lagged macroeconomic factors.
We decompose the indices into two parts: a macro component explained by past economic innovations and a residual component containing shocks that are orthogonal to lagged economic activity. We find that the negative relationship between policy uncertainty proxies and corporate investment is driven solely by the macro component. We find no relationship between policy uncertainty shocks and investment.
The results suggest that text-based proxies for uncertainty include significant first-moment shocks that confound inferences about the causal impact of policy uncertainty on investment.
Brandon Julio is an Associate Professor of Finance and the Alumni Investment Management Research Scholar at the University of Oregon. His research focuses broadly on corporate investment, capital structure, payout policy, policy uncertainty, and international finance.
Prior to joining the University of Oregon, Brandon was a faculty member at the London Business School. He received his PhD from the University of Illinois at Urbana-Champaign.
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