Europe Monthly Index
To measure European policy-related economic uncertainty, we construct an index from two types of underlying components. One component quantifies newspaper coverage of policy-related economic uncertainty. A second component uses disagreement among economic forecasters as a proxy for uncertainty.
News coverage about policy-related economic uncertainty
We construct this index in a similar manner as our index based on American newspapers. Here we include 2 papers from each of the largest 5 European economies (Germany, the United Kingdom, France, Italy, and Spain). The papers include El Pais, El Mundo, Corriere della Sera, La Repubblica, Le Monde, Le Figaro, the Financial Times, The Times of London, Handelsblatt, FAZ.
As with our American newspaper index, we utilize the number of news articles containing the terms uncertain or uncertainty, economic or economy, as well as policy relevant terms (scaled by the smoothed number of articles containing 'today'). Policy relevant terms include: 'policy', 'tax', 'spending', 'regulation', 'central bank', 'budget', and 'deficit'. All news searches are done in the native language of the paper in question.
Each paper-specific series is normalized to standard deviation 1 prior to 2011 and then summed. The series is normalized to mean 100 prior to 2011.
European Forecast Data
The second component of our European policy-related uncertainty index draws from forecast data from Consensus Economics. From Consensus Economics we obtain monthly data on individual forecasts regarding economic variables by professional forecasters. In particular, we utilize individual-level forecasts regarding consumer prices and federal government budget balances.
We chose these variables because they are directly influenced by monetary policy and fiscal policy actions. For each series, we look at the monthly forecasts for the following year. We treat the dispersion in the forecasts of these variables as proxies for uncertainty about monetary policy and about federal government budget balance. This approach builds on a long literature using disagreement among forecasters as a proxy for economic uncertainty.
For inflation, we look at the individual forecasts for the monthly consumer price levels for the following year. To construct the dispersion component, we then take the interquartile range of each set of inflation rate forecasts in each month. For the budget balance component, we look at the raw interquartile range of forecasts for the following year's budget balance and then divide this range by the country's current yearly GDP.
For both of these variables, due to the mechanically decreasing variance in forecasts as the next calendar year approaches, we remove monthly fixed effects from the data (post-removal components given in the downloadable data).
Constructing our overall policy-related economic uncertainty index
To construct our overall index of policy-related economy uncertainty, we first normalize each component by its own standard deviation prior to January 2011. We then compute the average value of the components for each of our five countries, using weights of 1/2 on our broad news-based policy uncertainty index and 1/4 on each forecast dispersion measure (Spain uses weights of ½ and ½ on its news component and consumer prices component as it lacks data on budget balances).
We then combine each individual country index after normalizing by an index's own standard deviation to construct our final index. We standardize the mean to equal 100 prior to 2011. Individual country index data is available for download but features more variability than the overall European or US indices due to being derived from fewer newspapers.