Uncovering Economic Policy Uncertainty During Conflict

The correct measurement of economic policy uncertainty (EPU) plays a critical role in many policy settings - in particular where economic policy decisions need to be taken in response to large shocks. One such large shock is armed conflict. But, counterintuitively, the standard text-based EPU index systematically declines during armed conflict periods. Using a global news corpus covering 192 countries and over 5 million articles, we show that this decline is driven not by reduced uncertainty, but by a crowding out of reporting on economics and policy. We show that a combination of topic modeling and two-way fixed effects can be used to adjust the measurement of EPU, providing a new view on political risk during armed conflict. After adjustment, the EPU aligns more closely with firm perceptions, political risk insurance and investment during armed conflict.