Economic policy uncertainty in Ireland.
The EPU index was developed by textually analyzing the only major Irish newspaper with high daily circulation figures and availability in an online archive starting in 1985. High circulation proxied for public-certified credibility as credible newspapers more strongly influence public uncertainty. Moreover, the articles in the index were required to contain one or more terms from each of the following categories: economy, uncertainty, and policy. Specifically, the terms are "economy," "economics," "economic;" "uncertainty," "uncertain;" "regulation," "legislation," "Dail," "deficit," "government," "central bank," and "Taoiseach." Web-scraping was used to collect the articles using code written in C# and executed in Microsoft SQL Server. I compiled these articles in an index of monthly frequency from January 1985 to January 2016 using the methods of Baker, Bloom, and Davis (The Quarterly Journal of Economics, 2016).
Although the index is noisy due to reliance on a single newspaper, it exhibits spikes during the months of major economic events. The EPU index tracks (i) foreign policy shocks: Anglo-Irish Agreement, Single European Act, Northern Ireland Fair Employment Act, and the collapse of the USSR; (ii) domestic and international conflicts: IRA assaults. Remembrance City Bombing, Gulf Wars 1 and 2, 9/11 attacks, and failed political coups; (iii) economic and financial crises: Finance Act of 1997, Eurozone Conversion, Greece Crisis, austerity measures, Anglo-Irish Bank nationalization, Irish Junk Bond Status, Ulster Bank Crisis, Occupy Dame Street, and the end of the Irish Bailout; (iv) political elections for Taoiseach and government offices as well as announcements of fiscal budgets. Ultimately, the index proxies for movements in policyrelated economic uncertainty.
I assessed the reliability of the index in a number of ways. First, I found that the index modestly correlated with the Volatility S&P 500 (VIX) (0.12) which proxied in absentia for an Irish Stock Exchange volatility index. Secondly, I compared my EPU index with those generated by Baker et al. (2016). The much stronger correlation between my Irish index and their United States (0.48) index was statistically significant, as well as correlations with their United Kingdom (0.62), European (0.49), and Spanish (0.38) indices. While these correlations make sense, a direct comparison of these indices was compromised due to differences in construction. Regardless, for Ireland this EPU index is useful given the lack of alternative uncertainty measures. Finally, I ran a battery of robustness checks to assess accuracy.
To gauge whether policy uncertainty shocks foreshadow weaker macroeconomic performance, I conducted a vector auto-regression (VAR) analysis with the following five variables: the EPU index, Irish Stock Exchange (ISEQ), interest rate, employment, and industrial production. I used a structural VAR of order p which takes the form:
[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII]
A and B are matrices of coefficients, [[member].sub.t] is a vector of unobservable zero mean white noise processes, and [Z.sub.t] gives the deterministic terms (constant drift and time trend). I found that 14 months was optimal. The VAR is identified using zero short-run restrictions. In particular, the Cholesky decomposition has the following order: EPU, log(ISEQ index), interest rate, log(employment), and log(industrial production), the VAR results--impulse response functions--suggest that a policy uncertainty innovation equivalent to the actual EPU increase of 70 points from 2004 to 2006 and 2009 to 2011 is associated with an estimated decline of 0.5% in the Irish Stock Exchange (ISEQ). Causality cannot be determined form these VAR results, but they do suggest that policy uncertainty shocks have macroeconomic consequences.
Regarding improvements for future research, it would be beneficial to incorporate more newspapers into the index when available. The index would also be augmented by analyzing uncertainty references in the House of Oireachtas' session transcripts or the Irish Central Bank's Quarterly Bulletin. Finally, generating an implied volatility index for the ISEQ could confirm the correlation between EPU events and stock market volatility. The complete version of "Economic Policy Uncertainty in Ireland," which includes data and an updated EPU index, is available on www.PolicyUncertainty.com.
Acknowledgements I am extremely grateful to my supervisor, Michael Curran, for his supportive mentorship and insightful contributions; Daniel Eliades, for his technical expertise in web-scraping; and the faculty of the Villanova Economics Department for their invaluable feedback, f would also like to express my sincerest gratitude to Nicholas Bloom, Steven Davis, and Scott Baker for the privilege of displaying my Irish EPU research on their website, www.PolicyUncertainty.com
Published online: 20 March 2017
JEL D80 * E50
Ryan Zalla 
[mail] Ryan Zalla
 Villanova University, Villanova, PA, USA
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|Publication:||Atlantic Economic Journal|
|Date:||Jun 1, 2017|
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