Economic policy uncertainty and bank stability: Size, capital, and liquidity matter

PurposeThis study investigates the impact of economic policy uncertainty on corporation innovation in innovative cities. The study sheds light on different results from the previous literature by testing the moderator effects of entrepreneurial risk appetite on such impact.Design/methodology/approachA static panel estimator is applied to a Chinese sample of 416 firm-year observations from 2010 to 2019. This paper uses regression model to test the impact of uncertainty on enterprise innovation in innovative cities, and to test the regulatory role of entrepreneurial risk appetite. For a series of robustness analysis conducted by the author to deal with endogeneity, the results are robust.FindingsThe author finds reliable evidence that the economic policy uncertainty can promote corporations to invest more in R&D in innovative cities. In addition, the role of the entrepreneurial initiative is significant, and there is a positive moderating effect of entrepreneurial risk appetite between policy uncertainty and corporation innovation.Research limitations/implicationsFrom a practical point of view, this study examines the impact of economic policy uncertainty on corporation innovation in innovative cities for the first time. It emphasizes the role of entrepreneurial risk-taking in the development of corporation innovation in Shenzhen, an innovative city. This research is of great significance to the formulation of government policies and the innovative choice of entrepreneurs. In addition, the research shows that the entrepreneurial risk appetite in innovative cities can have a positive impact on enterprise innovation. Therefore, when formulating policies, the government should take the subjective factors of entrepreneurs into account and support enterprises with innovation potential. The evidence of this study also helps entrepreneurs make innovative decisions and enhance their confidence in enterprise development.Originality/valueBy studying the impact of economic policy uncertainty on enterprise innovation under the regulation of enterprise risk appetite, this study shows the subjective and positive role of entrepreneurs in risk grasp in innovative cities for the first time. In addition, it fills the gap of the impact of policy uncertainty on innovative urban enterprises. In fact, although it is traditionally believed that economic policy uncertainty has a negative impact on enterprise innovation, the sensitive findings of this study reveal completely different results from previous studies.

The literature on the impact of policy uncertainty on climate change has grown rapidly in recent years as policymakers and researchers have become increasingly concerned about the potential adverse effects of policy uncertainty on environmental sustainability. This study aims to investigate the impact of economic policy uncertainty (EPU), GDP per capita, renewable energy consumption (REC), and foreign direct investment (FDI) on environmental sustainability from the perspectives of the environmental Kuznets curve (EKC) and pollution halo/haven hypotheses. The research employs panel data analysis techniques, including panel corrected standard errors (PCSE) and generalized least squares (GLS), to analyze the data from a panel of 19 developed and developing countries from 2001 to 2019. The results reveal that EPU, GDP per capita, REC, and FDI significantly impact GHG emissions, contributing to climate change. The results of the study confirm a U-shaped EKC and pollution haven hypothesis in the selected economies. The findings of this study provide valuable insights for policymakers, as they highlight the need to consider the interplay between economic growth, foreign investment, and environmental policy in addressing climate change. The results also suggest that reducing policy uncertainty and promoting sustainable economic growth can mitigate the effects of climate change and ensure environmental sustainability.

PurposeThe purpose of this study is to explore how the unprecedented rise in the economic policy uncertainty influence Indian banking sector stability. The unprecedented rise in the economic policy uncertainty during the recent pandemic has garnered the attention of policymakers to investigate its consequences on different sectors of the economy.Design/methodology/approachIn this quest, the present study uses system generalized method of moments and other econometric tools to examine the influence of economic policy uncertainty on the Indian banking sector, covering the time frame from 2000 to 2022. In addition, the current study also investigates the mediating role of regulation and supervision in the nexus of economic policy uncertainty and the Indian banking sector stability.FindingsThe empirical outcome reveals that economic policy uncertainty negatively influences banking stability. However, when economic policy uncertainty interacts with stringent banking regulations, private monitoring and supervisions, it assists in diversifying the negative impact of economic policy uncertainty on the Indian banking sector stability.Originality/valueTo the best of the author’s knowledge, the study is an original work and provides robust estimates that will assist policymakers in understanding the influence of policy uncertainty on the banking stability. Moreover, the study also helps in understanding the role of supervision and regulation in mitigating the negative consequences of policy uncertainty on the banking stability.

Frequent changes in economic policies will bring negative effects on the micro operating environment of banks. In this context, the functional effects of asset securitization create conditions for banks to effectively resist the adverse impact of economic policy uncertainty. In view of this, this paper examines the impact of economic policy uncertainty on the development of asset securitization of banks based on the related chain of “economic policy uncertainty—bank micro behavior change—asset securitization development”. It is found that the increase of economic policy uncertainty significantly promotes the development of bank asset securitization. Further, this paper discusses the internal mechanism of the positive impact, and finds that the adverse impact of economic policy uncertainty on the term mismatch, risk-taking and profitability of banks is an important motivation for banks to develop asset securitization, which confirms the original logic of the article, that is, the adverse impact of economic policy uncertainty on the micro operating environment of banks constitutes a series of motives for the development of bank asset securitization, and fully explains that the functional system of asset securitization can be an effective way for banks to cope with frequent policy changes. Finally, this paper studies the corresponding heterogeneity characteristics, and finds that economic policy uncertainty promotes the development of bank asset securitization, which is more significant in non-listed banks and small and medium-sized banks, because these banks lack sufficient adjustment means to adapt to the unstable political environment, and they need to use the functional system of asset securitization to deal with economic policy uncertainty. Therefore, it has a stronger impetus for the development of asset securitization.This paper holds that the main purpose of developing asset securitization is to deal with the uncertain external environment and its adverse impact on its own microstructure. Under the background that the outbreak of the COVID-19 Epidemic has led to the increase of economic policy adjustment and policy uncertainty, the regulatory authorities should not only continuously improve the institutional space for the effective function of asset securitization, but also pay attention to the “double-edged sword” feature of asset securitization, and strive to create a transparent and fair policy environment and stabilize the bank’s expectation of future policies. The conclusion of this paper expands the research field of bank asset securitization from the perspective of economic policy uncertainty, and deepens the cognition of the effect of economic policy uncertainty on bank behavior, which provides useful enlightenment for making the development strategy of asset securitization scientifically, and stabilizing bank behavior through the development of asset securitization under the background of the frequent adjustment of policies caused by the COVID-19 Epidemic.

Does economic policy uncertainty affect cross-border M&As? —— A data analysis based on Chinese multinational enterprises

We examine the influence of economic policy uncertainty on bank stability post-2007-2008 global financial crisis. We rely on the economic policy uncertainty (EPU) index introduced by Baker et al. (2016). We use 176,477 quarterly observations for US commercial banks over the period from 2011Q1 to 2020Q3 and find consistent and robust evidence that bank stability decreases as the level of economic policy uncertainty increases. We specifically control for demand-side effects which indicates that the decrease in bank stability not only originates from borrowers’ and customers’ conditions but also from a change in bank behavior. A deeper investigation shows that the negative impact of policy uncertainty on bank stability is stronger for larger banks, and weaker for highly capitalized banks as well as for more liquid banks. Our findings have important implications particularly for the COVID-19 policy implementations.

There are direct as well as indirect linkages between economic policy uncertainty and carbon market through the channels of market fundamentals. This paper theoretically analyzes the linkages between economic policy uncertainty and carbon price and empirically examines the impact of Chinese economic policy uncertainty on Hubei carbon prices. A two-regime Markov-Switching process is introduced into the VAR model to examine the impact of economic policy uncertainty during different regimes of the carbon market. The empirical results show that the two-regime Markov-Switching model applies well in modelling the return series from Hubei carbon market during April 2014 to December 2017. Under the two different regimes, although the impacts from economic policy uncertainty are both significantly positive, the magnitude of the impacts differs. The impact of Chinese economic policy uncertainty on Hubei carbon price is larger during the low volatility period on carbon market than that during the high volatility period on carbon market.

This article analyses the impact of Economic Policy Uncertainty (EPU) on the credit risk of US commercial banks considering their size, profitability and solvency. To achieve this goal, a sample of 2994 US commercial banks was selected for the period 2017–2019. Using panel data, the results reveal a statistically significant positive relationship between EPU and credit risk of US commercial banks. Banks of less profitability and less solvency were found to be more vulnerable to the effect of EPU on credit risk. No conclusive results were found regarding the impact of bank size on vulnerability to EPU. Overall, our evidence suggests that policy makers and bank managers should consider the effect of EPU on their decisions.

With the background of deepening uncertainty about global and Chinese economic policy, the stability of the banking industry is of great strategic significance for promoting the high-quality development of the real economy and maintaining the order of the financial market. This paper uses the panel data of 32 commercial banks in China during the period of 2007–2020 to test the impact of economic policy uncertainty on bank stability and the mediating role of opacity. The research results show that the economic policy uncertainty has a negative impact on bank stability. Opacity plays a partial intermediary role between economic policy uncertainty and bank stability: economic policy uncertainty indirectly affects bank stability by stimulating banks to reduce market exposure and improve earnings opacity.

Economic policy uncertainty has prominent effects on investment and output. Using unique transaction-level data in China, this paper explores the impact of economic policy uncertainty on land transaction premiums in China. On average, a 1% increase in the policy uncertainty level reduces land transaction premiums by 3.907 percentage points. The impact of policy uncertainty is more profound for firms with tighter financial constraints and land located in cities with lower rent-to-price ratios. The influence of policy uncertainty becomes weaker after the anti-corruption campaign in China, especially in provinces scrutinised by the central inspection teams, implying that improvements in the political environment alleviates the impact of policy uncertainty.

This study examines the impact of Economic Policy Uncertainty (EPU), capturing the extent to which a national economy is characterized by uncertainty about future tax codes, monetary policy, and government spending on the rate of entrepreneurial activity, including necessity entrepreneurship and opportunity entrepreneurship. Applying the system Generalized Method of Moments methodology on panel data covering 26 countries over 19 years, we show that higher EPU is associated with increased rates of necessity entrepreneurship. The results are significant even after controlling for other macro-level indicators and alternate EPU specifications. The results also suggest a lower rate of necessity entrepreneurship in developed economies, which reflects the role of safety nets as a shield against sudden loss of livelihood. We find no significant relationship between EPU and opportunity entrepreneurship, suggesting that opportunity entrepreneurship is governed by a more complex combination of factors. Our study contributes to the literature on determinants of entrepreneurship and offers important recommendations for entrepreneurs and policymakers.

We document a negative impact of economic policy uncertainty on stock liquidity. This impact is stronger for firms with: (i) higher sensitivity of stock returns to economic policy uncertainty; (ii) higher level of political risk; and (iii) heavier dependence on government spending. We identify three underlying economic channels that influence the adverse impact of policy uncertainty on stock market liquidity: higher cash flow risk; greater information asymmetry problems; and lower funding liquidity. Overall, our findings highlight the significant role of economic policy uncertainty in determining secondary market liquidity.

Time-varying causality impact of economic policy uncertainty on stock market returns: Global evidence from developed and emerging countries

The reason of economic fluctuation has always been the most important topic in macro-economy research. In traditional economic theory, there are many reasons for economic fluctuation, both monetary factors and real economic factors will cause economic fluctuation. This paper takes the uncertainty of economic policy as the object of investigation, based on the perspective of sustainable development, and empirically tests the specific impact of economic policy uncertainty on macro-economy in a complete economic cycle through TVP-VAR model. Investment, consumption and R&D are included as endogenous variables. This paper empirically tests the impact of economic policy uncertainty on macro-economy variables such as investment, consumption, economic output and inflation rate in a complete economic cycle. The results show that the uncertainty of economic policy has a negative impact on investment and consumption. The negative impact of economic policy uncertainty in the fourth phase is the strongest, and the short-term negative impact will continue to deepen after 2019 until 2021, and the impact of the first phase will remain at around -0.15%. The variable that has the greatest influence on output fluctuation is economic uncertainty, which accounts for 84.15% of the fluctuation. Secondly, technological progress contributes 79.88% to output fluctuation, and economic uncertainty has a negative impact on output. The impact of economic uncertainty on output fluctuation is stronger than that on consumption, capital and employment.

The comparative analysis of the effect of economic policy uncertainty on environmental sustainability is imperious as it can provide critical insights into the link between economic policies and environmental sustainability. Economic policy uncertainty may have different impacts in different economies. The present study provides a comparative analysis of the effect of economic policy uncertainty on environmental sustainability in developed and emerging economies. The study employs pooled ordinary least squares and panel quantile regression to analyze data from 2001 to 2019. Moreover, the study also compares the impact of economic policy uncertainty on environmental sustainability across two different econometric methods. It also compares the results across different quantiles of the distribution of variables. Moreover, the study includes the agriculture output, renewable energy consumption, and foreign direct investment in the model. The results show that economic policy uncertainty negatively and significantly impacts environmental sustainability as it increases GHG emissions. Moreover, agriculture output increases GHG emissions in developed economies at higher quantiles. Furthermore, the results also confirm the pollution haven hypothesis, while renewable energy consumption has a positive effect on environmental sustainability as it significantly reduces GHG emissions. The study stresses that governments should take measures to minimize economic policy uncertainty to improve environmental sustainability. In addition, effective policies to enhance openness in the policymaking process and offer long-term policy certainty and foster more stable investment conditions would encourage renewable energy and reduce GHG emissions.