Abstract
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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Indeed, evidence in Francis et al. (2014) indicates that elevated political uncertainty impacts the firms’ level of investments. In addition, elevated political uncertainty influences firms’ costs of bank loans by adding extra basis points on margins. These authors further show that lenders have additional advantage in pricing a borrower’s future political exposure. Moreover, from the credit supply side, those lenders with higher political exposure will demand additional loan margins.
References
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Ndou, E., Mokoena, T. (2019). Do Economic Policy Uncertainty Shocks Impact the Bank Lending Rate Margins?. In: Inequality, Output-Inflation Trade-Off and Economic Policy Uncertainty . Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-19803-9_29
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DOI: https://doi.org/10.1007/978-3-030-19803-9_29
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Publisher Name: Palgrave Macmillan, Cham
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