Effect Of Policy Uncertainty Research Articles

Policy uncertainty and bank’s funding costs: The effects of the financial crisis, Covid-19 pandemic, and market discipline

This paper examines the impacts of economic policy uncertainty (EPU) on bank funding costs using the 2001–2021 data of US banks. We document consistent evidence of a negative relationship between EPU and bank funding costs, implying lower bank funding costs during a time of high EPU, consistent with the hypothesis that economic agents tend to reallocate their assets into safer investments, such as bank deposits during high uncertainty. Large banks are likely to benefit most during high EPU when experiencing lower costs of funds compared with other banks, suggesting the “too-big-to-fail” perception of depositors. Cross-sectional analysis indicates that depositors require safer banks to pay lower rates, indicating the existence of market discipline. The cost-decreasing effects of policy uncertainty are less pronounced during the global financial crisis than the Covid-19 crisis.

Analysis of the Impact of Economic Policy Uncertainty on Environmental Sustainability in Developed and Developing Economies

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.

Lean against the wind: The effect of policy uncertainty on a firm's corporate social responsibility strategy

We examine the effect of policy uncertainty on firms' strategy of corporate social responsibility (CSR). During uncertain times, firms strategically increase their commitment to CSR causes. Policy uncertainty is positively associated with CSR performance regardless of the estimation method. CSR strategy can substitute for lobbying when firms attempt to manage policy uncertainty. Improved CSR performance can reduce firms' exposure to policy uncertainty which indicates that CSR commitment can deliver insurance-like benefits. The findings highlight the value of CSR commitments during uncertain times.

Economic policy uncertainty and trade: does export sophistication matter?

ABSTRACT In spite of the recent surge of research interest on the economic effect of policy uncertainties, trade behaviour during times of policy uncertainties is still not fully understood. We use the trade gravity model to examine the effects of economic policy uncertainty (EPU) on the trade of 22 countries over the period 1997–2020, based on the argument that EPU inflates bilateral trade costs. Overall, our results indicate that bilateral trade, exports, and imports are all negatively and significantly affected by both domestic and foreign policy uncertainties. Moreover, we document substantial heterogeneous trade reactions to policy uncertainties across countries. Specifically, in more export-sophisticated countries, our results show that only foreign policy uncertainty has a significant and negative effect on trade; whereas in less export-sophisticated countries, trade is significantly and negatively affected by both domestic and foreign EPU. These findings point to the double vulnerability of less export-sophisticated countries to domestic and foreign policy uncertainties and, to the resiliency of more export-sophisticated countries to domestic policy uncertainties and to their vulnerability to foreign policy uncertainties.

Lean against the Wind: the Effect of Policy Uncertainty on a Firm's Corporate Social Responsibility Strategy

Lean against the Wind: the Effect of Policy Uncertainty on a Firm's Corporate Social Responsibility Strategy

An exploration on policy uncertainty as a driver of R&D activity

We explore the relationship between uncertainty in economic policy and R&D activity for the sample of 576 firms from seven countries in the world. We base our analysis on an index of newspaper-based economic policy uncertainty (EPU) following the approach of Baker et al.’s (2016). We observe a significantly negative link between EPU and R&D intensity. Interestingly, the negative effect of policy uncertainty has less effect on the R&D activities of firms with growth opportunities. Finally, firms in politically sensitive industries respond stronger to EPU as far as R&D intensity is taken into account.

Inflation, interest rate, and firm efficiency: The impact of policy uncertainty

This study investigates the effect of inflation and interest rate on firm efficiency while exploring the role of policy uncertainty. Not a misnomer, macroeconomic conditions matter, and their impact on business strategy are inherently observed directly or indirectly. Yet, there is still a shortage of literature relating inflation and interest rate through the moderating effect of policy uncertainty on firm efficiency. With 92,293 observations from 12,207 US firms, we find that inflation positively affects firm efficiency, and interest rate negatively affects firms’ efficiency. Similarly, the moderating effect of policy uncertainty amplifies the significance of inflation and interest rate. Further examination of the moderating impact finds a positive directionality for both macroeconomic conditions for larger firms, firms that pay dividends, firms with a higher cost of goods and services and higher sales, and firms located in the Midwest region. The results are robust to firm-year fixed effects and clustering approaches.

Asymmetric effects of policy uncertainty on real sector variables in emerging markets: evidence from Brazil, India, China and South Africa

PurposeThis study investigated the asymmetric effects of changes in policy uncertainty on real sector variables in Brazil, China, India and South Africa.Design/methodology/approachThe study used the nonlinear autoregressive distributed lag (NARDL) modeling framework.FindingsThe results showed that both in the long run and short run, rising uncertainty not only increases consumer prices significantly in these economies, but also impedes aggregate and sectoral output growths, and deters investment, employment and private consumption. Contrary to economic expectation, the results also showed that in the long run, declining uncertainty impedes aggregate and sectoral output growths in these economies, and significantly hinders employment in South Africa and Brazil. This suggests that in the long run, economic agents in these economies somewhat behave as if uncertainty is rising. The authors also found significant asymmetric effects in the response of real sector variables to uncertainty both in the long run and short run, which justifies the choice of NARDL framework for this study.Research limitations/implicationsThe sample is limited to Brazil, India, China and South Africa. While Brazil, India and China are three of the most prominent large emerging market economies, South Africa is the largest emerging market economy in Africa.Practical implicationsTo lessen the adverse effects of policy uncertainty observed in the results, there is need for sound institutions and policy regimes that can promote predictable policy responses in these economies so that policy neither serves as a source of uncertainty nor as a channel through which the effects of other shocks are transmitted.Originality/valueApart from using the NARDL framework to capture the asymmetric effects of policy uncertainty, this study also accounted for the sectoral effects of uncertainty in emerging markets.

Effect of policy uncertainty on green growth in high-polluting economies

Environmental degradation has become one of the major concerns of the international community and the most debated topic at international forums. Therefore, policymakers have turned their attention from the traditional concept of economic growth to the more sustainable concept of growth known as green growth. This study tries to analyze the asymmetric effect of economic policy uncertainty (EPU) on green growth in top polluted economies over the period 1994–2020. Furthermore, this study also controls the issue of cross-sectional dependence while estimating the effects of EPU on green growth. From the results of the CS-ARDL model, we confer that the linear estimate attached to the EPU is significant and negative, implying that any uncertainty hurts the progress of green growth. On the other side, in the nonlinear model, the estimate attached to the positive shock of EPU is negatively significant, and the estimate attached to the negative shock of EPU is insignificant. This result confirms that positive shock in the EPU is harmful to green growth, and the negative shock in EPU does not have a significant role in determining green growth. The findings propose that the economic policy uncertainty issue must be considered while formulating green growth policies.

Economic policy uncertainty and stock price informativeness

Will economic policy uncertainty enhance stock price informativeness? Due to information and expected concerns, investors will consider policy uncertainty as risk. We examine the effect of policy uncertainty on firms' stock price informativeness and find a positive association. For expected economic policy uncertainty, the effect is weak and insignificant. Unexpected economic policy uncertainty is mainly affecting the stock price informativeness and institution investor behaviors are the reason for stock price informativeness increase. This association mainly exists in firms with private ownership, centralized equity, and smaller financial risk listed companies. We conclude that the policy uncertainty increases the stock price informativeness. The conclusions have theoretical and practical significance for finance market governance and corporate strategy.

Does the Economic Policy Uncertainty in the USA and China Affect Indian Stock Markets Symmetrically and Asymmetrically? An Empirical Analysis of Pre- and Post-Coronavirus Disease 2019 Timelines

Globalization and economic interconnections have recently garnered a lot of attention, and scholars and policymakers are delving into the effects of policy uncertainty on macroeconomic fundamentals against this backdrop, the current study investigates the symmetric and asymmetric effects of economic policy uncertainty (EPU) in the USA and China on the Indian benchmark index. Furthermore, the study also analyses the variation in results due to the occurrence of uncertain events. For the empirical analysis, non-linear autoregressive distributed lag (NARDL) and autoregressive distributed lag (ARDL) techniques have been employed, and the findings substantiate an asymmetric relationship between the US EPU and the Indian stock market, while a symmetric relationship between the Chinese EPU and the Indian stock market. The study also reveals that in the short run, the Indian stock market is immune to the fluctuations in the Chinese stock market and policy uncertainty. Moreover, the outcomes further reveal that the US and Indian stock markets project a mirror performance. In addition, the study further reveals that, unlike the pre-Coronavirus Disease 2019 (COVID-19) timeline, during the COVID-19, the short-run volatility was high between the explanatory and outcome variables. The study is an original work and offers several useful recommendations.

Effect of policy uncertainty on environmental innovation

Uncertainty in economic policies and regulations incentivizes firms to delay investments in environmental research and developments (R&D) or postpone environmental projects that are costly to undo. A consequence of those decisions is that firms innovate less for the environment. Using 1026 U.S. firm data (equivalent to 13,241 firm-year observations) this study shows that a negative effect of policy uncertainty – a drop in environmental innovation – does not surface in the short term but in the longer term, i.e., in 5–6 years’ time. The negative effect, nevertheless, dissipates after six years. These findings are of relevance to other developed countries as well as emerging countries that have a relatively higher uncertainty in their economic policies and regulations. In sum, the results call for attention from governments and regulators around the world: uncertainty in policies and regulations are detrimental to combating climate change and promoting environmental sustainability .

Economic policy uncertainty: The probability and duration of economic recessions in major European Union countries

We study the impact of economic policy uncertainty on the probability and duration of economic recessions in 10 major European Union countries over the period 1987Q2–2021Q1. We find that economic policy uncertainty results in not only a higher probability of economic recessions but also longer recessions. Specifically, with a one-standard-deviation increase in the economic policy uncertainty index, on average the probability of an economic recession goes up by 14%, and the probability of an economic recession ending reduces by 27%, controlling for general economic uncertainty and economic and political factors. Moreover, we find that fiscal expansion, adequate political support, and left-wing governments’ policies are important to alleviate the effects of policy uncertainty on the likelihood of economic recessions.

Time-Frequency connectedness of policy uncertainty, geopolitical risk and Chinese commodity markets: evidence from rolling window analysis

ABSTRACT This article investigates the time-frequency connectedness of categorical policy uncertainty, geopolitical risk and Chinese commodity markets by applying the vector autoregression method for the period from August 2004 to March 2021. Specifically, our research employs rolling window analysis of wavelet decomposition series to uncover the dynamic properties of connectedness with a time-frequency framework. The results indicate that heterogeneity exists across time scales for policy-specific uncertainty, geopolitical risk and commodities throughout the study period. In particular, the directional connectedness shows that the commodity markets are most closely related to monetary policy uncertainty, followed by exchange rate policy uncertainty, fiscal policy uncertainty and trade policy uncertainty, and finally geopolitical risk. In addition, connectedness exhibits an obvious changing trend during the crisis period, and the spillover effects of policy uncertainty and geopolitical risk increase dramatically. Finally, the long-term connectedness between policy uncertainty, geopolitical risk and commodities are stronger than that in the short-term periods. Overall, our findings provide valuable implications that policymakers and investors should pay attention to dynamic and time-frequency features of connectedness when making decisions.

Policy Uncertainty, Official Social Capital, and the Effective Corporate Tax Rate-Evidence From Chinese Firms.

The political environment has a significant impact on the sustainable development of enterprises. This manuscript aims to investigate the effect of policy uncertainty and official social capital on enterprises’ effective tax rate (ETR) due to the change of officials. Based on the panel data from the Chinese Industrial Enterprise Database from 1998 to 2009, it is shown that the policy uncertainty caused by the change of local government officials significantly increases the ETR of enterprises. Meanwhile, municipal officials who have social ties with provincial officials in their province also tend to raise the ETR of industrial enterprises, and this tendency is more evident when the officials take office. Further research shows that the effects vary in many aspects for policy uncertainty and social capital on the ETR of enterprises. The findings of this manuscript provide support for a deeper understanding of the change in local government fiscal policies and give suggestions to strengthen political environmental governance for the sustainable development of enterprises.

Policy uncertainty and cash dynamics

AbstractWhy and when do firms deviate from target cash? And why do we observe imperfect adjustment of cash? I postulate and provide evidence that policy uncertainty induces financing frictions and adjustment costs, which decelerate the speed of adjustment (SOA) of cash toward target. I find that the effects of policy uncertainty on SOA are higher for firms that operate below target cash than for firms that operate above target cash. The results suggest that under policy uncertainty shocks, firms deviate from target cash as the expected benefit of deviation is greater than the expected value of approaching the target.

Asymmetric effects of policy uncertainty on renewable energy consumption in G7 countries

Given the role that renewable energy consumption plays in transitioning to a low-carbon economy, it is critical for policymakers to understand its determinants. Although uncertainty has increased significantly since the early 2000s, little is known about its effect. To fill this gap, the paper provides novel evidence of the effect of policy-induced uncertainty on renewable energy consumption after controlling for income, institutions and innovation in G7 countries over the period 1997–2019.Using the nonlinear autoregressive distributed lag model, the paper reveals its asymmetric effects in the long run, implying that both a negative and a positive shock in lagged uncertainty reduce renewable energy consumption. The effect of uncertainty proved to be significant in the same direction, but not asymmetric in the short run. However, the effect of all other variables remained insignificant in the short run, which is not the case in the long run. Indeed, the results confirm that income and investment in research and development drive renewables, while it is hindered by more economic freedom in the long run. Therefore, consistent, clear and well-communicated energy and economic policies are called for, along with technological advances, as they can help minimize policy uncertainty and promote renewable energy use.

Economic policy uncertainty, financial development, and financial constraints: Evidence from China

Financial frictions are important transmission mechanism of the adverse effect of policy uncertainty on economic output. We use Chinese listed firms’ data to verify the mechanism directly by empirically examining whether economic policy uncertainty (EPU) exacerbates corporate financial constraints and whether financial development can mitigate the impact of policy uncertainty on financial constraints. We find that economic policy uncertainty causes a significant increase in the firm financial constraints level. We further find that financial development mitigates the adverse impact of EPU on financial constraints. Financial development also relieves the increase in cost of capital and the significant decrease in cash flow caused by rising EPU through which EPU affects financial constraints. Further analysis shows that the moderating effect is much stronger when the firm is credit constrained, (e.g., small firms and non-state-owned enterprises).

Spillover effects of policy uncertainty on the foreign exchange rate: Evidence from selected developed and developing countries

Following the Great Depression of the 1930s, a number of prominent economists believe that the global financial crisis that erupted in 2008 from the American financial market played a significant role in changing the path of global economic progress and intensifying various uncertainties in various market-related activities and processes. Therefore, our research has attempted to quantify how the U.S.‘s economic and monetary policy uncertainty affects the dollar's exchange with its 12 major trading partners, both from developed and developing countries. As part of our analysis, we also factored out the potential impact of the recent global financial crisis—2008. We applied the MM-QR panel conditional quantile regression of Machado and Silva (2019) to the monetary model for exchange rate determination with data from 2000:M1 to 2017:M2. Even though the global financial crisis is under control, the estimated results of the MM-QR panel conditional quantile regression have revealed that the developed countries' economic policy uncertainty, not the U.S.'s economic policy uncertainty, has caused their currencies to depreciate against the U.S. dollar. But the uncertainty of U.S. economic policy has had an asymmetric effect on the exchange rates of developing countries against the U.S. dollar before and after the global financial crisis. Moreover, the U.S.‘s monetary policy uncertainty has depreciated both developed and developing countries' currencies against the U.S. dollar, both with and without control of the global financial crisis. The global financial crisis has also depreciated developing countries' currencies while it has appreciated developed countries' currencies against the U.S. dollar. As a result, this study concludes that whether in developed or developing countries, economic and monetary policy uncertainty has a significant impact on the nominal exchange rate.

Re-examination of risk-return dynamics in international equity markets and the role of policy uncertainty, geopolitical risk and VIX: Evidence using Markov-switching copulas

This study re-examines the empirical relationship between risk and return from 1994m12 to 2020m08 in fifteen international equity markets employing the novel time-varying Markov switching copula models. We provide first-time insightful evidence of time-varying Markov tail dependence structure and dynamics between risk and return in international equity markets. Results show that the dependence structure is positive for USA, UK, Germany, Italy, Brazil, Australia, Taiwan, Canada, Mexico, Japan, France and South Africa and negative for Singapore, India, Japan and China. Finally, we document the effects of policy uncertainty, geopolitical risk and VIX conditional on different markets states.