31. Are Credit Growth Reactions to Expansionary Monetary Policy Shocks Weakened by Heightened Economic Policy Uncertainty?

Evidence indicates that positive (negative) economic policy uncertainty shocks lower (raise) credit extension and tighten (loosen) credit conditions. Evidence shows that expansionary monetary policy shocks lead to bigger increases in credit growth in the low economic policy uncertainty regime through amplifications from loosening credit conditions index. The findings show that elevated economic policy uncertainty directly weakens the transmission of the effects of expansionary monetary policy shocks onto credit growth. Thus economic policy uncertainty regimes matter for the efficacy of the credit conditions channel in transmitting expansionary monetary policy shocks to credit growth. Hence a large reduction in the policy rate by more than expected may be required to achieve a similar impact and this may lead to extensive loosening in the credit conditions.