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Economic policy uncertainty and the credit channel: Aggregate and bank level U.S. evidence over several decades

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  • Bordo, Michael D.
  • Duca, John V.
  • Koch, Christoffer

Abstract

Economic policy uncertainty affects decisions of households, businesses, policy makers and financial intermediaries. We first examine the impact of economic policy uncertainty on aggregate bank credit growth. Then we analyze commercial bank entity level data to gauge the effects of policy uncertainty on financial intermediaries’ lending. We exploit the cross-sectional heterogeneity to back out indirect evidence of its effects on businesses and households. We ask (i) whether, conditional on standard macroeconomic controls, economic policy uncertainty affected bank level credit growth, and (ii) whether there is variation in the impact related to banks’ balance sheet conditions; that is, whether the effects are attributable to loan demand or, if impact varies with bank level financial constraints, loan supply. We find that policy uncertainty has a significant negative effect on bank credit growth. Since this impact varies meaningfully with some bank characteristics – particularly the overall capital-to-assets ratio and bank asset liquidity-loan supply factors at least partially (and significantly) help determine the influence of policy uncertainty. Because other studies have found important macroeconomic effects of bank lending growth on the macroeconomy, our findings are consistent with the possibility that high economic policy uncertainty may have slowed the U.S. economic recovery from the Great Recession by restraining overall credit growth through the bank lending channel.

Suggested Citation

  • Bordo, Michael D. & Duca, John V. & Koch, Christoffer, 2016. "Economic policy uncertainty and the credit channel: Aggregate and bank level U.S. evidence over several decades," Journal of Financial Stability, Elsevier, vol. 26(C), pages 90-106.
  • Handle: RePEc:eee:finsta:v:26:y:2016:i:c:p:90-106
    DOI: 10.1016/j.jfs.2016.07.002
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    Cited by:

    1. repec:eee:jmacro:v:55:y:2018:i:c:p:128-145 is not listed on IDEAS
    2. Ansgar Belke & Daniel Kronen, 2017. "The impact of uncertainty on macro variables - An SVAR-based empirical analysis for EU countries," ROME Working Papers 201711, ROME Network.
    3. Michael D. Bordo & John V. Duca, 2018. "The Impact of the Dodd-Frank Act on Small Business," NBER Working Papers 24501, National Bureau of Economic Research, Inc.
    4. Ambrocio, Gene, 2017. "The real effects of overconfidence and fundamental uncertainty shocks," Research Discussion Papers 37, Bank of Finland.
    5. repec:bdr:ensayo:v:35:y:2017:i:82:p:64-77 is not listed on IDEAS
    6. Ansgar Belke & Thomas Osowski, 2017. "International Effects of Euro Area versus US Policy Uncertainty: A FAVAR Approach," ROME Working Papers 201703, ROME Network.
    7. Ambrocio, Gene, 2017. "The real effects of overconfidence and fundamental uncertainty shocks," Research Discussion Papers 37/2017, Bank of Finland.
    8. repec:eee:inecon:v:111:y:2018:i:c:p:143-158 is not listed on IDEAS
    9. Lee, Seohyun, 2017. "Three essays on uncertainty: real and financial effects of uncertainty shocks," MPRA Paper 83617, University Library of Munich, Germany.
    10. Peter Claeys, 2017. "Uncertainty spillover and policy reactions," Revista Ensayos sobre Política Económica, Banco de la Republica de Colombia, vol. 35(82), pages 64-77, April.
    11. Piergiorgio Alessandri & Margherita Bottero, 2017. "Bank lending in uncertain times," Temi di discussione (Economic working papers) 1109, Bank of Italy, Economic Research and International Relations Area.
    12. repec:eee:dyncon:v:81:y:2017:i:c:p:50-64 is not listed on IDEAS
    13. John V. Duca & Lilit Popoyan & Susan M. Wachter, 2016. "Real Estate and the Great Crisis: Lessons for Macro-Prudential Policy," LEM Papers Series 2016/30, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
    14. Michael D. Bordo & John V. Duca, 2018. "The Impact of the Dodd-Frank Act on Small Business," NBER Working Papers 24501, National Bureau of Economic Research, Inc.
    15. Prüser, Jan & Schlösser, Alexander, 2017. "The effects of economic policy uncertainty on European economies: Evidence from a TVP-FAVAR," Ruhr Economic Papers 708, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    16. Duca, John V. & Saving, Jason L., 2018. "What drives economic policy uncertainty in the long and short runs: European and U.S. evidence over several decades," Journal of Macroeconomics, Elsevier, vol. 55(C), pages 128-145.
    17. Peter Claeys, 2017. "Uncertainty spillover and policy reactions," ENSAYOS SOBRE POLÍTICA ECONÓMICA, BANCO DE LA REPÚBLICA - ESPE, vol. 35(82), pages 64-77, April.

    More about this item

    Keywords

    Money and banking; Economic policy uncertainty; Business cycles;

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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