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

Abstract

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 index of national security is found relatively useful as predictors of recession. This category-specific measure of uncertainty provides information about the occurrence of recession that the other variables do not contain.