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The instability of U.S. economic policy: A hindrance or a stimulus to green financing?

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  • Liu, Fangying
  • Su, Chi Wei
  • Tao, Ran
  • Umar, Muhammad

Abstract

This article aims to evaluate whether green bonds (GB) can hedge the policy uncertainty risk and enhance the stability of the U.S. economic environment. Existing research provides sufficient theoretical support for GB to diversify economic risks and optimise investment portfolios. Against this background, we adopt the bootstrap rolling-window method to detect the causality between GB and economic policy uncertainty (EPU). The findings evidence that GB is positively influenced by EPU, suggesting that policy uncertainty risk stimulates the growth of green financing. Therefore, GB can be considered a valid hedge against uncertainty shocks. This outcome is supported by the general equilibrium model, which indicates that EPU has specific influences on GB. The adverse impact of GB on EPU demonstrates that GB can improve U.S. policy stability. Moreover, the GB market has an early warning effect on the economic situation, which can be a barometer reflecting EPU fluctuations. GB has become an essential asset for investors in the ongoing global economy and financial market turbulence. Hence, when formulating economic policies, the government should consider the impact of policy changes on the GB market and offset the negative influences of policy fluctuations.

Suggested Citation

  • Liu, Fangying & Su, Chi Wei & Tao, Ran & Umar, Muhammad, 2023. "The instability of U.S. economic policy: A hindrance or a stimulus to green financing?," Economic Analysis and Policy, Elsevier, vol. 80(C), pages 33-46.
    • Handle: RePEc:eee:ecanpo:v:80:y:2023:i:c:p:33-46
    DOI: 10.1016/j.eap.2023.07.015
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    More about this item

    Keywords

    Green bonds; Economic policy uncertainty; Causal relationship; Rolling window;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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