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Uncertainty and Credit: The Chicken or the Egg Causality Dilemma

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  • Chi Wei Su
  • Shuqi Lv
  • Meng Qin
  • Diego Norena-Chavez

Abstract

This paper seeks to explore whether bank credit (BC) contains useful information for mitigating economic policy uncertainty (EPU). The results of the bootstrap rolling-window test show that EPU is an effective channel for triggering BC. Additionally, it finds a feedback effect of BC on EPU, indicating that BC is a favorable tool for predicting EPU. Rising policy uncertainty leads banks to adopt aggressive or conservative credit strategies, which further increases policy adjustments. This circular relationship seems to be caught in a chicken or egg dilemma, demonstrating the importance of the government and the banking system in maintaining economic stability.

Suggested Citation

  • Chi Wei Su & Shuqi Lv & Meng Qin & Diego Norena-Chavez, 2024. "Uncertainty and Credit: The Chicken or the Egg Causality Dilemma," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 60(11), pages 2560-2578, September.
    • Handle: RePEc:mes:emfitr:v:60:y:2024:i:11:p:2560-2578
    DOI: 10.1080/1540496X.2024.2318299
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    Cited by:

    1. Su, Chi-Wei & Yang, Shengyao & Dumitrescu Peculea, Adelina & Ioana BiĊ£oiu, Teodora & Qin, Meng, 2024. "Energy imports in turbulent eras: Evidence from China," Energy, Elsevier, vol. 306(C).
    2. Cao, Fangzhi & Su, Chi-Wei & Qin, Meng & Moldovan, Nicoleta-Claudia, 2024. "The investment of renewable energy: Is green bond a safe-haven to hedge U.S. monetary policy uncertainty?," Energy, Elsevier, vol. 307(C).
    3. Wu, Jiawen & Li, Jing-Ping & Su, Chi-Wei, 2024. "Can green bond hedges climate policy uncertainty in the United States: New insights from novel time-varying causality and quantile-on-quantile methods?," Economic Analysis and Policy, Elsevier, vol. 82(C), pages 1158-1176.
    4. Wei Su, Chi & Yue Song, Xin & Qin, Meng & LobonĊ£, Oana-Ramona & Umar, Muhammad, 2024. "Optimistic or pessimistic: How do investors impact the green bond market?," The North American Journal of Economics and Finance, Elsevier, vol. 74(C).

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