Do Economic Policy Uncertainty Shocks Impact the Bank Lending Rate Margins?
Evidence indicates that positive economic policy uncertainty shocks raise bank lending rate margins. By contrast, the negative economic policy uncertainty shock lowers bank lending rate margins. The counterfactual VAR evidence shows that inflation below 6 % dampens the actual rise in the bank lending rate margins following positive economic policy uncertainty shocks. Thus policymakers should consider that, a large reduction in the repo rate than expected is needed to overcome the mitigating effects of elevated economic policy uncertainty in raising the bank lending rate margins even in a low inflation environment.
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