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Economic policy uncertainty and financial stability–Is there a relation?

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  • Phan, Dinh Hoang Bach
  • Iyke, Bernard Njindan
  • Sharma, Susan Sunila
  • Affandi, Yoga

Abstract

This paper investigates the impact of economic policy uncertainty on financial stability. Using data for 23 countries over the period of 1996 to 2016, we show that the impact is negative and statistically significant. Economically, a unit standard deviation increase in economic policy uncertainty decreases financial stability by between 2.66% and 7.26% of its sample mean. The negative impact of economic policy uncertainty on financial stability is stronger for countries with higher competition, lower regulatory capital, and smaller financial systems. We show that our finding is robust using bank-level data and different constructions of global panel portfolios, and controlling for Z-score skewness, the Global Financial Crisis, and for endogeneity.

Suggested Citation

  • Phan, Dinh Hoang Bach & Iyke, Bernard Njindan & Sharma, Susan Sunila & Affandi, Yoga, 2021. "Economic policy uncertainty and financial stability–Is there a relation?," Economic Modelling, Elsevier, vol. 94(C), pages 1018-1029.
    • Handle: RePEc:eee:ecmode:v:94:y:2021:i:c:p:1018-1029
    DOI: 10.1016/j.econmod.2020.02.042
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