Forecasting US recession with the economic policy uncertainty indexes of policy categories

Kazutaka Kurasawa


Uncertainty about the future affects economic decisions today since there is an option value to postpone economic decisions. Using the economic policy uncertainty (EPU) indexes of policy categories developed by Baker et al. (2016), this study estimates the probit model to predict the recession probability in the United States, and quantifies the relative significance of the category-specific EPU indexes. The EPU indexes of national security and regulation are found relatively useful as predictors of recession. These category-specific measures of uncertainty provide information about the occurrence of recession that the other variables do not contain.


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