Uncertainty and Credit: The Chicken or the Egg Causality Dilemma

Su C.W.; Lv S.; Qin M.; Norena-Chavez D. · Emerging Markets Finance and Trade (2024) · DOI: 10.1080/1540496x.2024.2318299

Resumen

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.

Instituciones: Universidad de Lima