Economic policy uncertainty in Ireland

This investigation provides an alternative technique for assessing business cycles in Ireland. I construct a new index of economic policy uncertainty (EPU) based on newspaper coverage frequency. Using C# and Microsoft SQL for web scraping, I compile thousands of articles from one of Ireland’s most widely circulated newspapers from 1985-2016, each containing key terms that are positively associated with policy-driven uncertainty in the Irish economy. The index displays sharp spikes in conjunction with the Great Recession of 2008, the Good Friday Agreement of 1998, and the Eurozone Conversion of 1999, as well as fluctuations around political elections and terrorist activity. Furthermore, the index telegraphs shocks to macroeconomic variables such as the interest rate, stock market, industrial production, and employment. I assess the impact of policy uncertainty on the economy through the lens of structural vector auto-regressions (VARs) which are fitted to the Irish data and identified through short-run restrictions. The VAR results suggest that a policy uncertainty innovation equivalent to the actual EPU increase of 70 points from 2004-2006 and 2009-2011 is associated with an estimated decline of 0.5% in the Irish Stock Exchange (ISEQ). Causality cannot be determined from these VAR results, but they do suggest that policy uncertainty shocks have macroeconomic consequences. Public officials and policymakers must understand the consequences of public uncertainty on the economy. Newspapers publicly disseminate political, fiscal, and monetary news into the public which cultivates uncertainty, leading to unintended ripple effects in the economy. The EPU index is a creative method for observing and potentially measuring the impact of this uncertainty on the economy, thus providing a useful metric tool to enlighten policymakers.