Impact Of Economic Policy Uncertainty Research Articles

The Impact of Economic Policy Uncertainty on Real Effective Exchange Rate and Systemic Risks --Based on TVP-VAR Modeling

Today's international situation is complex and volatile, and the impact of economic policy uncertainty on systemic financial risk has attracted much attention. In this essay, the TVP-VAR model is used to investigate the mechanism of economic policy uncertainty on systemic financial risk and real effective exchange rate. It is found that its effect on both was characterized by time-varying and nonlinear, and the impact on systemic financial risk is mainly long-term, while the impact of real effective exchange rate is mainly short- and medium-term as long as. Meanwhile, the impact of economic policy uncertainty on systemic financial risk and real effective exchange rate under some specific risk events is more lasting.

How does economic policy uncertainty impact CO2 emissions? Investigating investment's role across 22 economies (1997–2021)

Economic policy uncertainty (EPU) has significant implications for both economic growth and CO2 emissions through investment and consumption. Existing research has produced mixed findings on the impact of EPU on CO2 emissions. Nevertheless, there is a need for further empirical investigation into the role of investment in the relationship between EPU and CO2 emissions in various economies. This article contributes to the literature by examining the investment channel in the EPU-CO2 emissions nexus in 22 economies using annual panel data from 1997 to 2021. The analysis was conducted using eight specifications to classify the empirical estimates of the direct and indirect impacts of EPU on CO2 emissions through the investment channel. The CD test, CADF test, and CIPS test were used to test for cross-sectional dependence, unit root, and cointegration, respectively. The GMM estimation technique was used to test for the long-run relationship. The empirical results suggest that both direct and indirect EPU stimuli on CO2 emissions through the investment channel are positive, and the EKC hypothesis holds. Furthermore, findings show that fossil-fuel energy usage leads to an increase in CO2 emissions. Given the significant impact of economic policy uncertainty on CO2 emissions, policymakers should consider the environmental implications of their policy decisions. Second, reducing fossil fuel energy usage in the production process should be a priority to mitigate the impact of EPU on CO2 emissions.

Economic policy uncertainty and volatility of corporate bond credit spread: Evidence from China and the United States

In the prevailing situation of economic instability, it is customary for governments to enact economic policies aimed at influencing the decision-making processes of corporations. Nevertheless, the uncertainty surrounding economic policies inevitably impacts the capital structure of firms, consequently giving rise to fluctuations in corporate bond credit spreads through various transmission channels. Therefore, this study examines the impact of economic policy uncertainty (EPU) on the volatility of corporate bond credit spread in China and the United States (U.S.) from January 2014 to July 2021. Developing a one-sided filtering single-factor and multi-factor GARCH-MIDAS model in which monthly EPU and daily corporate bond credit spread are used as variables with different frequencies, the total volatility of corporate bond credit spread is decomposed into long- and short-term volatility components. Utilising the EPU data, encompassing indices delineating EPU in the U.S. (Baker et al., 2016) and China (Huang and Luk, 2020), alongside the corporate bond credit spreads in both the Chinese and American markets, we find that the level and volatility of EPU positively impact the long-term volatility of corporate bond credit spread with different ratings. Moreover, the EPU level contributes to more than 12% to the total volatility of corporate bond credit spread in the Chinese samples and more than 4.31% in the U.S. samples. While the variance of EPU contributes to over 5.19% to the total volatility of corporate bond credit spread in the U.S. samples, which is more than that of the Chinese samples.

Economic policy uncertainty and cash dividend policy: evidence from China

This paper investigates the impact of economic policy uncertainty (EPU) on the dividend policy of listed companies, alongside its underlying mechanisms. Based on a panel data compilation from 4421 Chinese listed companies spanning 2007 to 2021, the research demonstrates that EPU significantly increases the cash dividends of listed companies. Our findings resolve endogeneity issues and are robust to different variable definitions. The influence is more significant among smaller, non-state-owned companies, as well as those with lower equity concentration and lower financial constraints. We further find that EPU heightens investors’ demand for dividends, increases agency costs, and reduces business growth opportunities to improve companies’ dividend distribution tendency. Moreover, we find that increasing dividend payout when EPU increases is aligned with shareholders’ wealth maximization objective.

Exploring the asymmetric influence of economic policy uncertainty on the nonlinear relationship between exchange rate and carbon prices in China

Our objective is to investigate the impact of economic policy uncertainty (EPU) on the risk spillover effect between exchange rates and carbon prices. First, we employ the time-varying parametric vector autoregression (TVP-VAR) method to assess the dynamic nonlinear risk spillover effect between four exchange rates and China's carbon price for the period from September 2, 2013, to April 29, 2022. Our findings reveal a significant time-varying spillover effect between exchange rates and carbon prices. Among them, carbon prices and the EUR/CNY exchange rate predominantly act as risk contributors, and a pronounced correlation is observed among various exchange rates. Furthermore, the magnitude of risk spillover and interdependence intensifies significantly in response to major events. Second, we employ quantile-to-quantile regression (QQR) to examine the impact of EPU on risk spillover. Our results indicate that the influence of EPU on risk spillover exhibits is characterized by marked asymmetry and heterogeneity. At high levels of EPU, EPU has a substantial positive impact on risk spillover. However, when the risk spillover is already elevated, the effect of EPU tends to diminish. Based on these findings, we propose several policy recommendations, including prudent treatment of exchange rate adjustments, fostering stability in carbon prices, and the enactment of robust economic policies.

The tail risk of crude oil Price_Based on EPU and geopolitical risk perspective

This study investigates the conditional prediction of crude oil price growth rates as a function of geopolitical risk (GPR) and economic policy uncertainty (EPU), characterizing the extreme tail risk characteristics. Utilizing monthly data on crude oil futures price growth rates from 1997 Jan to 2022 Dec, we employ Quantile Regression and Growth at Risk models to capture the heterogeneous and asymmetric effects of GPR and EPU across different quantiles of the oil price distribution. The sample period covers major geopolitical events, economic recessions, and the emergence of new energy sources, providing a comprehensive view of the factors influencing crude oil market dynamics.The empirical findings reveal significant asymmetries in the forecast density function of crude oil price growth rates, with periodic right-skewed deviations during financial crises and epidemic situations, and prevalent left-skewed deviations during the remaining sample periods. The impact of EPU on crude oil prices is found to be more pronounced in the short to medium term, while the influence of GPR persists over a longer duration, exacerbating the upside risk of price growth. The study highlights the effectiveness of EPU and GPR in capturing the tail characteristics of crude oil price growth, offering valuable risk identification indicators for policymakers and market participants.Furthermore, the analysis uncovers the heterogeneous effects of EPU and GPR across different quantiles of the oil price distribution. The results indicate that the relationship between these uncertainty measures and crude oil prices varies depending on the market conditions and the specific quantile examined. This finding underscores the importance of considering the entire distribution of crude oil prices rather than focusing solely on the conditional mean.The study contributes to the existing literature by providing a comprehensive examination of the role of geopolitical risk and economic policy uncertainty in driving crude oil price dynamics, with a particular focus on tail risks. The findings have important implications for risk management strategies in the energy sector.By employing advanced econometric techniques and considering a wide range of geopolitical and economic factors, this study offers new insights into the complex and evolving nature of crude oil price dynamics. The results highlight the need for policymakers and market participants to consider the asymmetric and heterogeneous effects of uncertainty measures when assessing the risks and opportunities in the crude oil market.

Economic policy uncertainty and capital flows' tail risk in China

Since the financial crisis, uncertainty has been a focus of attention in the financial sector. As the two-way opening-up of China's financial market continues to accelerate, special attention must be paid to the risks and challenges arising from cross-border capital flows to maintain financial market stability in China. This study uses predictive quantile regression and skewed t-distribution fitting method to examine the impact of Economic Policy Uncertainty (EPU) on the full probability distribution and tail risks of capital flows. Additionally, we apply the “Capital Flows at Risk (CFaR)” analysis framework from the new paradigm of macroeconomic research to the situation in China, to study the impact of EPU on CFaR. We find that EPU significantly affects the predictive distribution of capital flows. When EPU is rising, the downside risk of capital flows, that is, the left-tail risk of capital flows, will increase; however, when EPU is declining, the upside risk of capital flows, that is, the right-tail risk of capital flows, will increase. In recent years, the scale of China's CFaR has shown a fluctuating upward trend, and EPU has increased the scale of CFaR in the country. This study is significant for stabilizing international capital flows and preventing and defusing the external financial shocks of cross-border capital inflows and outflows.

Synchronicity and Sentiment: Decoding Earnings Quality and Market Returns in EU under Economic Policy Uncertainty

This study investigates the impact of economic policy uncertainty on earnings quality and market returns in the European Union, a topic of growing importance in the wake of fluctuating global economic conditions. Using data from 14 EU countries spanning the period from 2000 to 2022, the findings of this study are significant, revealing a clear correlation between heightened economic policy uncertainty and altered investor behavior, as well as a deterioration in earnings quality. We also found that (a) stock market returns are threatened by the shroud of economic uncertainty, (b) higher market sentiment anticipates a negative return but, on the other hand, lower market sentiment expects an increase in the return, (c) stock market returns are higher in the case of highly accurate analyst forecasts, and (d) stock market returns are higher in the case of a higher level of stock return synchronicity. These insights have profound implications for investors, policymakers, and scholars, offering a deeper understanding of market dynamics under uncertainty and guiding more informed decision-making in turbulent economic times.

The uncertainty of economic policies in the United States and its impact on the stock markets of some African countries: An empirical study with VAR modeling

The economic and financial integration that has taken place over the last 20 years has led to a situation where the reaction of financial markets is no longer solely due to local factors, but also to macroeconomic and financial news of regional and international origin. In this regard, we focus on the effect of the international transmission of uncertainty shocks on global stock market performance. Given that the United States is the world’s leading economic power, some studies have highlighted the adverse effects of the international propagation of US uncertainty shocks on international stock markets (Ehrmann and Fratzscher, 2009; Klobner and Sekkel, 2014; Hammoudeh et al., 2016).
 Using VAR modeling, our study examines the specific impact of economic policy uncertainty in the USA on the stock markets of four African countries: Tunisia, Egypt, Morocco, and South Africa. Although geographically distant from the USA, these economies are closely integrated into the global economy and are likely to be affected by international economic and political developments, particularly those originating in the USA, a major economy and a key player on the global stage.

The impact of economy policy uncertainty and oil price shocks on G20 banks’ stock performance: Wavelet coherence and non-parametric causality in quantiles approach

This study employs nonparametric causality-in-quantiles and wavelet coherence techniques to examine the impact of economic policy uncertainty and oil price variations on bank stocks in twelve prominent global economies. The results reveal that the effects of both economic policy uncertainty and oil prices on bank stock values vary significantly across countries and over time. Notably, during stress periods, we observe an inverse relationship between economic policy uncertainty and bank stocks in multiple countries, namely, Brazil, Canada, France, India, Russia, and the USA, with Japan exhibiting a particularly strong and long-term adverse correlation. Similarly, the influence of oil prices is primarily observed during crisis periods, but it demonstrates a substantial co-movement with bank stocks across the sample countries except Brazil. Our empirical analysis holds valuable implications for policymakers, bankers, investors, and portfolio managers.

Economic Policy Uncertainty and Bank Credit Growth in Indonesia

Objective: This study examines the influence of economic policy uncertainty in countries with the largest capital investments in Indonesia, such as Singapore, China, Hong Kong, Japan, the United States, Korea, and the United Kingdom, on the credit growth of commercial banks in Indonesia. Design/Methods/Approach: The sample of this study is all commercial banks in Indonesia from January 2011 to December 2022. This study uses a quantitative approach, using monthly aggregate data on credit growth of commercial banks in Indonesia and economic policy uncertainty data for each country. Hence, the number of observations in this study amounts to 144. This study uses multiple linear regression with the EViews 12 analysis tool. Findings: The findings in this study show that the influence of economic policy uncertainty in the country with the largest capital investment in Indonesia has various influences. Of the several countries that were observed in the study, Japan was one of the countries that had a significant negative impact on the growth of commercial bank credit in Indonesia. Originality/Value: This study complements several previous studies regarding the impact of economic policy uncertainty on Indonesia's micro and macro economy. Studies regarding the impact of economic policy uncertainty on Indonesia's banking credit growth are still limited. Practical/Policy implication: The findings of this study can be used as a reference for banking managers when making decisions such as credit portfolio diversification. By spreading exposure to various sectors and industries, banks can reduce risks related to economic uncertainty in specific sectors. Banking managers need to design products and services that are more creative and adaptive to help banks remain competitive and attract customer interest amidst an uncertain economic situation.  

Managing bank liquidity hoarding during uncertain times: The role of board gender diversity

AbstractThis paper examines the effect of executive board gender diversity on the relationship between economic policy uncertainty (EPU) and bank liquidity hoarding (LH). We focus on the Russian banking sector, which, relative to most of the world, has a high share of women on bank executive boards. Using the news‐based EPU index developed by Baker, Bloom, and Davis (2016) and LH measures proposed by Berger, Guedhami, Kim, and Li (2022), we exploit a unique dataset from the Russian banking sector. While higher economic policy uncertainty tends to increase liquidity hoarding, we find that this effect diminishes as the gender diversity of the board increases. We attribute this finding to the moderating influence of gender diversity on stability and overreaction in decision‐making. Additionally, we find that the channel through which board gender diversity affects the impact of economic policy uncertainty on liquidity hoarding takes place via the hoarding of liquid assets. Our findings are robust to the use of alternative measures for economic policy uncertainty and gender diversity and hold after addressing endogeneity concerns. As women are still significantly under‐represented on bank boards in most countries, these results argue for policies to promote gender diversity on bank boards as a means of limiting the detrimental effects of economic policy uncertainty.

Understanding sustainable growth in the face of economic policy uncertainties

AbstractThis paper investigates the impact of economic policy uncertainty (EPU) in China, measured by a news-based index, on the sustainable growth of 2771 Chinese non-financial A-share firms (including 1674 SMEs and 1097 non-SMEs) from 2010 to 2022. We also analyze how green business practices moderate the impact of EPU on firms' sustainable growth. After implying various econometric models, this study finds that EPU has a significant negative effect on the sustainable growth of Chinese firms, which is more pronounced among non-SMEs. Heterogeneity analysis reveals that the negative impact of EPU on CSG is more pronounced in big firms, highly leveraged firms, firms with low liquidity and low financialization in China. We further reveal that this negative impact of EPU stems from trade policy uncertainties. Furthermore, findings reveal that green business activities positively moderate the association between EPU and sustainable growth, and that this moderating impact is more pronounced among SMEs. These findings are consistent with various robustness approaches. This paper provides useful insights for enterprises to improve their sustainable growth in the context of economic policy uncertainties by adjusting their number of employees, board of directors, average age of staffs, financialization level and debt flexibility.

Economic policy uncertainty, political connections, and M&As: Evidence from China

We find that political connections can help firms mitigate the negative impact of Economic Policy Uncertainty (EPU) on the frequency and dollar value of acquisitions in a sample of Chinese firms from 2007 to 2019. The effect is stronger for firms with higher EPU sensitivity, with higher leverage, and in heavily regulated energy and agricultural sectors. The impact of political connections appears to be based on the information advantage and not on the financing channel. A government anti-corruption rule introduced in 2013 prohibiting current and former officials from working for enterprises is used as an exogenous shock to political connections to mitigate endogeneity concerns. The prohibition appears to reduce acquisition activities when EPU is high.

Dynamic impacts of multidimensional uncertainty on the renminbi exchange rate: Insights from time-varying analysis

Using a time-varying model, this study investigates the dynamic impact of multidimensional uncertainty by considering data from the policy, finance, and energy markets on the renminbi (RMB) exchange rate from 2001 to 2022. It analyzes specific influence patterns during critical economic periods. We find that multiple dimensions of uncertainty influence the RMB exchange rate rapidly and that these influences exhibit notable temporal variation. (1) The dynamic impact of economic policy uncertainty (EPU) on the RMB exchange rate depends not only on the magnitude of EPU but also on the divergence between domestic and global EPU (also called relative uncertainty). When the domestic EPU is lower than its global counterpart, it can still promote RMB appreciation, even at high levels. (2) The dynamic effect of stock market uncertainty depends on the balance between asset substitutability and risk contagion. The dominance of asset substitutability triggers RMB appreciation during periods of stock market uncertainty. (3) The escalation of energy market uncertainty significantly increases the value of the RMB; this effect is especially pronounced after the financial crisis. Against the backdrop of heightened global economic uncertainty and the significant challenge of maintaining exchange rate stability, regulators should focus on the impact of relative uncertainty and prevent excessive spillovers from other markets. Fostering a risk-neutral mindset and effectively leveraging uncertainty is crucial for forming stable market expectations for exchange rates.

The impact of economic policy uncertainty on capital structure decisions: Does institutional ownership characteristics matter?

The impact of economic policy uncertainty on capital structure decisions: Does institutional ownership characteristics matter?

The impact of economic policy uncertainty on the profitability of textile industry: evidence from BRIC countries

ABSTRACT There has recently been a growing interest in the impact of economic policy uncertainty at the micro- and macro-level in developing and emerging market economies. This study aims to analyse the impact of economic policy uncertainty on the profitability of more than 500 publicly listed textile companies in BRIC countries for the period 2012–2021. By employing the panel data methodology, we find that the economic policy uncertainty has a significantly negative contemporaneous and lagged effect on financial performance. Our findings are robust to both alternative profitability metrics and dynamic model specifications. We also identify that economic policy uncertainty exerts an adverse impact on profitability through the capital structure channel at the micro-level and institutional quality channel at the macro-level. While equity capital can emerge as a powerful weapon against the consequences of heightened uncertainty at the firm level, any improvement in the institutional framework at the national level can also help firms to mitigate the losses from unanticipated policy changes. However, there are certain limitations to which good institutions absorb uncertainty shocks when they are permanently at a high plateau.

Economic policy uncertainty and banks’ portfolio adjustment: evidence from Japan

ABSTRACT We empirically examine the impact of Economic Policy Uncertainty (EPU) on banks’ portfolio adjustment under the capital requirement of Japanese banks from 2002–2019. We find that when EPU increases, Japanese banks hold more government bonds but fewer stocks. Japanese banks extend more loans to large companies but reduce loans to small- and medium-sized enterprises (SMEs). Internationally active banks reduce securities drastically relative to domestic banks.

Economic Policy Uncertainty, Political Connections, and Total Factor Productivity in China

Purpose – This paper aims to elucidate the complex relationship between Economic Policy Uncertainty (EPU) and Total Factor Productivity (TFP) in the context of Chinese A-share listed companies, exploring how various factors influenced this relationship from 2008 to 2020. Design/Methodology/Approach – Our research design utilizes a comprehensive dataset from Chinese A-share listed companies across various sectors to explore the impact of Economic Policy Uncertainty (EPU) on Total Factor Productivity (TFP). We analyze a range of factors, including pollution intensity, manufacturing status, market indices, institutional attention, analyst coverage, internal control mechanisms, and bank shareholding. Findings – The findings provide a nuanced understanding of how Economic Policy Uncertainty (EPU) impacts Total Factor Productivity (TFP) across Chinese A-share listed companies. Our analysis reveals that the influence of EPU on TFP is not uniform but varies significantly across different contexts, underscored by a variety of moderating factors. Among these, institutional attention and analyst coverage emerge as critical elements that shape the dynamics between EPU and TFP. Institutional attention, indicating the extent to which firms are monitored by regulatory bodies and investment institutions, plays a pivotal role in mitigating the negative effects of EPU. Research Implications – The findings provide valuable insights for policymakers and industry stakeholders, emphasizing the importance of strategic alignment in managing economic uncertainties. The study contributes to understanding the dynamics of economic policy uncertainties in a complex market like China, helping inform more effective policy and management strategies.

The impact of economic policy uncertainty on insurance demand: the moderating effect of national culture

ABSTRACT We scrutinize the influence of economic policy uncertainty on the demand for insurance and delve into the moderating effect of national culture. Using an OLS model with two-way fixed effects, we find that heightened EPU engenders a decline in insurance demand, with discernible variances observed in the long-term and short-term effects on life and non-life insurance demand. Notably, uncertainty avoidance, power distance, and long-term orientation act as moderators, mitigating the adverse impact of EPU on insurance demand. Conversely, individualism exacerbates the negative consequences. Furthermore, our investigation uncovers that EPU primarily diminishes insurance demand by constraining residents’ income.