State-level economic policy uncertainty

Abstract

We quantify and study state-level economic policy uncertainty. Tapping digital archives for nearly 3500 local newspapers, we construct three monthly indexes for each state: one that captures state and local sources of policy uncertainty (EPU−S), one that captures national and international sources (EPU−N), and a composite index that captures both. EPU−S rises around gubernatorial elections and own-state episodes like the California electricity crisis of 2000–01 and the Kansas tax experiment of 2012. EPU−N rises around presidential elections and in response to 9–11, Gulf Wars I and II, the 2011 debt-ceiling crisis, the 2012 fiscal cliff episode, and federal government shutdowns. Close elections elevate policy uncertainty much more than the average election. VAR models fit to pre-COVID data imply that upward shocks to own-state EPU foreshadow weaker economic performance in the state, as do upward EPU shocks in contiguous states. The COVID-19 pandemic drove huge increases in policy uncertainty and unemployment, more so in states with stricter government-mandated lockdowns.