AI-powered index quantifies deregulation's economic impact
Federal Reserve economists have developed a news-based index of deregulation for the United States from 1960 to 2025 using large language models. The research finds that deregulation shocks significantly boost investment, productivity, stock prices, and GDP.
AI maps deregulation's economic path
Researchers at the Federal Reserve Board constructed a news-based index of deregulation for the United States spanning 1960 to 2025.
This innovative approach utilizes large language models to semantically classify newspaper articles, distinguishing between deregulation and increased regulation, and assigning intensity scores based on policy stage.
The index captures major reform episodes across various sectors, including transportation, telecommunications, and finance.
Positive shocks to this deregulation index are found to significantly boost investment, productivity, stock prices, profits, and overall GDP.
Industry-specific deregulation shocks also lead to increased industry-level stock returns, suggesting that deregulation impacts incumbent profitability and operational efficiency more than competitive entry.
This method covers the entire economy and weighs regulatory shifts by their newsworthiness, capturing policy changes before they materialize in law.
News coverage predicts policy shifts
The news-based deregulation index was validated against human classifications and a parallel index from Federal Register documents.
Human coding confirmed strong agreement with AI (r=0.69).
Notably, the news index leads the Federal Register index by nearly one year, reflecting media coverage of policy intentions before formal implementation.
This timing advantage is crucial, as financial markets and businesses adjust to regulatory news well before official rules take effect.
The approach captures expectational shifts, offering a more timely signal of regulatory policy's dynamic economic effects than traditional, lagging measures.
Beyond the rulebook: Policy's true pulse
This study offers a vital, forward-looking tool for understanding regulatory shifts, moving beyond static rule counts.
It quantifies deregulation's positive economic effects, with its lead time over official records providing policymakers earlier insights.
This methodology could reshape how central banks and governments assess the real-time influence of regulatory changes on growth and stability.