Economic Policy Uncertainty and the Credit Channel: Aggregate and Bank Level U.S. Evidence Over Several Decades

41 Pages Posted: 18 Jul 2016

See all articles by Michael D. Bordo

Michael D. Bordo

Rutgers University, New Brunswick - Department of Economics; National Bureau of Economic Research (NBER)

John V. Duca

Federal Reserve Banks - Federal Reserve Bank of Dallas

Christoffer Koch

Federal Reserve Bank of Dallas

Multiple version iconThere are 2 versions of this paper

Date Written: 2016-07-08

Abstract

Economic policy uncertainty aspects decisions of households, businesses, policy makers and financial intermediaries. We first examine the impact of economic policy uncertainty on aggregate bank credit growth. Then we analyze commercial bank entity level data to gauge the effects of policy uncertainty on financial intermediaries' lending. We exploit the cross-sectional heterogeneity to back out indirect evidence of its effects on businesses and households. We ask (i) whether, conditional on standard macroeconomic controls, economic policy uncertainty affected bank level credit growth, and (ii) whether there is variation in the impact related to banks' balance sheet conditions; that is, whether the effects are attributable to loan demand or, if impact varies with bank level financial constraints, loan supply. We find that policy uncertainty has a significant negative effect on bank credit growth. Since this impact varies meaningfully with some bank characteristics - particularly the overall capital-to-assets ratio and bank asset liquidity-loan supply factors at least partially (and significantly) help determine the influence of policy uncertainty. Because other studies have found important macroeconomic effects of bank lending growth on the macroeconomy, our findings are consistent with the possibility that high economic policy uncertainty may have slowed the U.S. economic recovery from the Great Recession by restraining overall credit growth through the bank lending channel.

Keywords: money and banking, economic policy uncertainty, business cycles

JEL Classification: E40, E50, G21

Suggested Citation

Bordo, Michael D. and Duca, John V. and Koch, Christoffer, Economic Policy Uncertainty and the Credit Channel: Aggregate and Bank Level U.S. Evidence Over Several Decades (2016-07-08). FRB of Dallas Working Paper No. 1605. Available at SSRN: https://ssrn.com/abstract=2810447 or http://dx.doi.org/10.24149/wp1605

Michael D. Bordo (Contact Author)

Rutgers University, New Brunswick - Department of Economics ( email )

New Brunswick, NJ
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

John V. Duca

Federal Reserve Banks - Federal Reserve Bank of Dallas ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States

Christoffer Koch

Federal Reserve Bank of Dallas ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX Texas 75265-5906
United States

HOME PAGE: http://www.dallasfed.org

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