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Financial regulation policy uncertainty and credit spreads in the US

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  • Nodari, Gabriela

Abstract

This paper investigates the linear and nonlinear effects of financial regulation policy uncertainty shocks on US macroeconomic aggregates within a Vector Autoregressive (VAR) framework. Financial regulation policy uncertainty (FRPU) is quantified with a news-based index developed by Baker et al. (2013). Particular attention is paid to the reaction of corporate credit spreads to FRPU shocks. The linear VAR results suggest that exogenous increases in the FRPU index trigger increases in the cost of external finance as well as a persistent negative impact on the real economy. By using a nonlinear (Smooth-Transition) VAR model, I then show that these effects are asymmetric over the business cycle, i.e., credit spreads are estimated to rise three times more during recessions than in non-recessionary periods. Importantly, in both the linear and nonlinear models, FRPU shocks account for large shares of the variability of unemployment and credit spreads. My findings are supported by various robustness checks.

Suggested Citation

  • Nodari, Gabriela, 2014. "Financial regulation policy uncertainty and credit spreads in the US," Journal of Macroeconomics, Elsevier, vol. 41(C), pages 122-132.
  • Handle: RePEc:eee:jmacro:v:41:y:2014:i:c:p:122-132
    DOI: 10.1016/j.jmacro.2014.05.006
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    More about this item

    Keywords

    Uncertainty shocks; Financial regulation policies; Credit spreads; Financial frictions;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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