Overview
We construct a new measure of uncertainty about Federal Reserve policy actions and their consequences, a monetary policy uncertainty (MPU) index. Our index is uniquely useful in bridging periods of conventional and unconventional policy making. Large spikes in our index occurred around the March 2003 invasion of Iraq, prior to the September 2015 FOMC meeting when “liftoff uncertainty” peaked, Brexit, the November 2016 elections, and during the prior administration's criticism of Fed Chair in 2019 .
Description
Our MPU index is constructed using automated text-search results of the ProQuest Newsstand and historical archives of leading newspapers in the country of interest. For example, to capture the degree of uncertainty the public perceives about Federal Reserve policy actions and their consequences, we construct the U.S. MPU index by searching for keywords related to monetary policy uncertainty in the Financial Times, Wall Street Journal, and Washington Post. In particular, we search for articles containing the triple of (i) "uncertainty" or "uncertain," (ii) "monetary policy(ies)" or "interest rate(s)" or "Federal fund(s) rate" or "Fed fund(s) rate," and (iii) "Federal Reserve" or "the Fed" or "Federal Open Market Committee" or "FOMC". The daily count of identified articles is divided by the total number of news articles mentioning the Federal Reserve (or more precisely, any of the words in (iii) above) for each newspaper in a given period. The share of articles is subsequently normalized to have a unit standard deviation for each newspaper over the sample period. The MPU index is aggregated by summing the resulting series and scaling them to have a mean of 100 over the sample.
We also aggregate their daily index into buckets based on the FOMC calendar. Specifically, the first day of each bucket is the day following the previous FOMC meeting, and the last day is the date of the meeting in the current period, with each value reported on the date of the meeting.
Compared to related measures based on survey data and market volatility, our measure has the advantage of (1) being available during time periods and for countries when market or survey data are not available and (2) better capturing uncertainty in periods with unconventional monetary policy when the policy rate is at or near the lower bound. In addition, our measure in principle represent uncertainty perceived by a different and potentially broader segment of the population. Compared to related measures constructed by Baker, Bloom, and Davis (2015) that are global in nature, our U.S. MPU measure is U.S. centric and focuses on uncertainty related to Fed monetary policy.
Data
The monthly MPU index for the U.S. can be found here, also available in HAVER.
The datasets containing MPU indexes for the U.K, Canada, Japan, and Euro area can be found here.
It can be cited as Husted Lucas, John H. Rogers, and Bo Sun, 2020, “Monetary Policy Uncertainty,” Journal of Monetary Economics.