EPU stands for Economic Policy Uncertainty. It is a term used in economics and finance to describe the level of uncertainty or unpredictability surrounding economic policies and their potential impact on the economy. EPU measures the degree to which economic policies and their future implications are uncertain and changing, contributing to higher levels of market or investor uncertainty and risk aversion.
The concept of EPU takes into account various economic policy factors including fiscal policy, monetary policy, trade policy, regulatory policy, and political factors that can influence economic decision-making. These policies and factors are subject to change, particularly during times of political transitions, economic crises, or major policy reforms, causing uncertainty about their future direction and implications.
EPU is typically measured by constructing an economic policy uncertainty index using various indicators such as media coverage of policy-related uncertainty, forecast errors, and disagreement among economists or experts regarding policy outcomes. The index is designed to capture the magnitude and volatility of economic policy uncertainty over time.
High levels of EPU can have significant effects on the economy and financial markets. Increased uncertainty may hinder investment decisions, leading to reduced business activity, declining consumer confidence, and decreased economic growth. EPU can also create volatility in financial markets, as investors become more cautious and risk-averse. Governments and policymakers often strive to reduce EPU by providing more clarity and transparency in their policy frameworks, fostering stable and predictable economic environments.
