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Economic policy uncertainty and the supply of business loans

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  • Barraza, Santiago
  • Civelli, Andrea

Abstract

Using a Vector Autoregressive framework of analysis, we show that banks contract their supply of business credit in response to an exogenous increase in economic policy uncertainty. This contraction takes two main, distinct forms. On the one hand, banks restrict their supply of spot funds, which we document using flows of loans and term loan originations. On the other hand, banks also curtail their provision of liquidity insurance, reducing the amount of new credit lines and embedding in them a pricing structure that reduces the probability of borrowers drawing down on the lines. At the peak of the responses, we find that a one-standard-deviation increase in EPU causes a contraction in the supply of business loans between 3 and 5% on the extensive margin.

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  • Barraza, Santiago & Civelli, Andrea, 2020. "Economic policy uncertainty and the supply of business loans," Journal of Banking & Finance, Elsevier, vol. 121(C).
  • Handle: RePEc:eee:jbfina:v:121:y:2020:i:c:s0378426620302454
    DOI: 10.1016/j.jbankfin.2020.105983
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    More about this item

    Keywords

    Economic policy uncertainty; Bank lending; Business; Credit;
    All these keywords.

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • E66 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General Outlook and Conditions
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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