"Measuring U.S. fiscal policy uncertainty: The COVOL approach"

Abstract

"This study proposes a market-based measure of fiscal policy uncertainty (FPU) using the COVOL framework of Engle and Campos-Martins (2023). We construct overall, short-term, and long-term FPU indices for the US at a daily frequency, based on common volatility among fiscal-sensitive assets from 6 September 2013 to 25 April 2025. The FPU indices show evidence of statistical validity and economic relevance. They are event-sensitive, with pronounced spikes around major fiscal and political episodes, notably US presidential elections and President Trump’s tariff announcements. Empirical analyses further show that innovations in the FPU indices are associated with predominantly unidirectional macroeconomic and financial responses: industrial production, real GDP, private investment, tax revenue, and some equity indices tend to decline, while unemployment and government debt tend to increase. At the sectoral level, regressions reveal that FPU amplifies volatility, especially in Real Estate and Financials. Moreover, the FPU indices display weak but long memory, suggesting persistence yet mean reversion. Overall, our study provides a market-based FPU measure that complements existing approaches and offers practical value for forecasting, planning, and fiscal policymaking. © The Author(s), under exclusive licence to Springer Nature B.V. 2026."