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Non-linear nexus between economic policy uncertainty and bank lending

Author

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  • Shabir, Mohsin
  • Jiang, Ping
  • Hashmi, Shujahat Haider
  • Bakhsh, Satar
Abstract
Our study examines the non-linear effect of economic policy uncertainty (EPU) on bank lending, using bank-level panel data of 19 countries for the period 2006–2018. We find that EPU reduces bank lending, but this effect varies across banks and market structure and is significantly higher during the financial crisis. Specifically, there is a significant threshold effect of bank competition on EPU and bank lending nexus. Countries with lower competitive environment increase the adverse impact of policy uncertainty. Additional robustness tests exhibit that institutional quality increases bank lending and mitigates negative economic policy uncertainty, while strict bank regulations increase this negative impact. Moreover, the adverse impact of EPU on bank lending is significant in a subgroup of developed countries. Our empirical work has specific policy implications for banks, regulatory bodies, and government agencies for decision-making.

Suggested Citation

  • Shabir, Mohsin & Jiang, Ping & Hashmi, Shujahat Haider & Bakhsh, Satar, 2022. "Non-linear nexus between economic policy uncertainty and bank lending," International Review of Economics & Finance, Elsevier, vol. 79(C), pages 657-679.
    • Handle: RePEc:eee:reveco:v:79:y:2022:i:c:p:657-679
    DOI: 10.1016/j.iref.2022.02.016
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    1. Shabir, Mohsin & Jiang, Ping & Shahab, Yasir & Wang, Wenhao & Işık, Özcan & Mehroush, Iqra, 2024. "Diversification and bank stability: Role of political instability and climate risk," International Review of Economics & Finance, Elsevier, vol. 89(PB), pages 63-92.
    2. Lean, Hooi Hooi & Alkhazali, Osamah M. & Gleason, Kimberley & Yeap, Xiu Wei, 2024. "Connectedness and economic policy uncertainty spillovers to the ASEAN stock markets," International Review of Economics & Finance, Elsevier, vol. 90(C), pages 167-186.
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    6. Klus, Sylwia & Rogalinska, Aleksandra & Stefanski, Artur & Urbanowicz, Zuzanna & Wanat, Leszek, 2023. "Dilemmas of Bank Activities Under Economic Uncertainty -Selected Examples from the Polish Market from the Pandemic Period," Roczniki (Annals), Polish Association of Agricultural Economists and Agribusiness - Stowarzyszenie Ekonomistow Rolnictwa e Agrobiznesu (SERiA), vol. 25(6).

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    More about this item

    Keywords

    Economic policy uncertainty; Bank competition; Bank lending; Panel threshold model;
    All these keywords.

    JEL classification:

    • F68 - International Economics - - Economic Impacts of Globalization - - - Policy
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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