ECB research refines trade policy uncertainty measures
A new European Central Bank study highlights limitations of text-based trade policy uncertainty measures, proposing a refined indicator for more accurate macroeconomic analysis. The research, published in the Economic Bulletin, addresses contamination from broader economic and political reporting.
Beyond the headline numbers
The traditional trade policy uncertainty (TPU) index, which counts trade and uncertainty keywords in press articles, has shown significant spikes, notably during the first US-China trade conflict and reaching a historical high in April 2025.
However, standard linear models often imply implausibly large macroeconomic effects from these readings.
The ECB research highlights that these text-based indicators can be contaminated by broader media coverage, where trade policy is mentioned alongside other economic or geopolitical risks.
This can inflate TPU counts, leading to misinterpretations if the index is treated as a pure uncertainty shock.
For instance, articles discussing economic uncertainty from tariffs, rather than uncertainty about future trade policy itself, contribute to this inflation.
The study therefore cautions against mechanically interpreting raw TPU indicator readings.
Cleaning the signal from the noise
The study proposes an alternative TPU measure, refined by eliminating contaminating influences.
This is achieved by statistically cleaning the raw index, regressing it on proxies for broad economic policy uncertainty, geopolitical risk, market volatility (VIX, oil price), financial stress (US NFCI), supply chain pressures (GSCPI), and effective tariff rates.
This process removes variation explained by historical co-movements of uncertainty-related keywords.
The cleaned indicator shows significantly smaller spikes throughout 2025, being only 20 percent as high as the raw index.
This supports the view that the unadjusted TPU indicator may be misinterpreted in high-uncertainty environments.
Clarity for better forecasts
Adjusting TPU measures significantly improves their indicator properties and interpretability for macroeconomic analysis.
By removing confounding influences and media cycle effects, these refined indicators yield more plausible macroeconomic impacts than commonly reported.
This clarity is crucial for defining robust scenarios in conditional forecasting and projection exercises, directly enhancing the reliability of Eurosystem/ECB staff macroeconomic projections.