Uncertainty and Credit: The Chicken or the Egg Causality Dilemma

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

Emerging Markets Finance and Trade, 2024, vol. 60, issue 11, 2560-2578

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.

Date: 2024
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DOI: 10.1080/1540496X.2024.2318299

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