Abstract
Evidence indicates that positive (negative) economic policy uncertainty shocks lower (raise) credit extension and tighten (loosen) credit conditions. Evidence shows that expansionary monetary policy shocks lead to bigger increases in credit growth in the low economic policy uncertainty regime through amplifications from loosening credit conditions index. The findings show that elevated economic policy uncertainty directly weakens the transmission of the effects of expansionary monetary policy shocks onto credit growth. Thus economic policy uncertainty regimes matter for the efficacy of the credit conditions channel in transmitting expansionary monetary policy shocks to credit growth. Hence a large reduction in the policy rate by more than expected may be required to achieve a similar impact and this may lead to extensive loosening in the credit conditions.
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Notes
- 1.
- 2.
It must be pointed out that theory predicts different effects of macroeconomic uncertainty shocks on economic growth via different channels. For instance, the real-option and growth-option theories propose different theoretical outcomes on economic due to how these uncertainty channels may influence investment.
- 3.
Increased macroeconomic uncertainties leading to deterioration of firms’ financial conditions will influence the operating performance of financial lending firms. The deterioration in the financial conditions increases operational risk leading to unstable financial situation.
- 4.
Recent explanation indicates these dynamics are potent when combined with endogenous growth mechanism which includes the R&D investment or those that embody technological change or human capital investment. Bachmann et al. (2013) suggest that when R&D sectors exhibit feature of the wait and see mechanism particularly, then persistent and not transitory uncertainty shocks could lead to prolonged if not permanent effects on economic uncertainty.
- 5.
The results are robust to the inclusion of credit conditions index, inflation and annual changes in rand per US exchange rate.
References
Bachmann, R., Elstner, S., & Sims, E. R. (2013). Uncertainty and economic activity: Evidence from business survey data. American Economic Journal: Macroeconomics, 5(2), 217–249.
Chi, Q., & Wi, W. (2017). Economic policy uncertainty, credit risks and banks’ lending decisions: Evidence from Chinese commercial banks. China Journal of Accounting Research, 10, 33–50.
Gumata, N., & Ndou, E. (2017). Bank credit extension and real economic activity in South Africa: The impact of capital flow dynamics, bank regulation and selected macro-prudential tools. Cham: Palgrave Macmillan.
Hlatshwayo, S., & Saxegaard, M. (2016). The consequences of policy uncertainty: Disconnects and dilutions in the South African real effective exchange rate-export relationship (IMF Working Paper WP/16/113).
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Ndou, E., Mokoena, T. (2019). Are Credit Growth Reactions to Expansionary Monetary Policy Shocks Weakened by Heightened Economic Policy Uncertainty?. In: Inequality, Output-Inflation Trade-Off and Economic Policy Uncertainty . Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-19803-9_31
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DOI: https://doi.org/10.1007/978-3-030-19803-9_31
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