Uncertainty and Credit: The Chicken or the Egg Causality Dilemma

Chi Wei Su, Shuqi Lv, Meng Qin, Diego Norena-Chavez

Research output: Contribution to journalArticlepeer-review

9 Scopus citations

Abstract

This paper seeks to explore whether bank credit (BC) contains useful information for mitigating economic policy uncertainty (EPU). The results of the bootstrap rolling-window test show that EPU is an effective channel for triggering BC. Additionally, it finds a feedback effect of BC on EPU, indicating that BC is a favorable tool for predicting EPU. Rising policy uncertainty leads banks to adopt aggressive or conservative credit strategies, which further increases policy adjustments. This circular relationship seems to be caught in a chicken or egg dilemma, demonstrating the importance of the government and the banking system in maintaining economic stability.

Original languageEnglish
Pages (from-to)2560-2578
Number of pages19
JournalEmerging Markets Finance and Trade
Volume60
Issue number11
DOIs
StatePublished - 2024
Externally publishedYes

Keywords

  • bank credit
  • Economic policy uncertainty
  • rolling-window test

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