Financial Regulation Policy Uncertainty and Credit Spreads in the U.S

This paper quantifies the macroeconomic effects of surprise movements in uncertainty about financial regulation policies in the U.S. economy. Within the context of a Structural VAR model, exogenous variations in financial regulation policy uncertainty lead to a widening in corporate credit spreads, and can potentially trigger flight to quality and flight to liquidity episodes. Financial regulation policy uncertainty shocks also induce a strong and persistent reduction of industrial production, an increase in unemployment and a deflationary phase, acting as negative demand shocks. A variance decomposition analysis underlines the contribution of the shock for the dynamics of the macro observables. These findings are supported by a variety of robustness checks.