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2019 | OriginalPaper | Chapter

29. Do Economic Policy Uncertainty Shocks Impact the Bank Lending Rate Margins?

Authors : Eliphas Ndou, Thabo Mokoena

Published in: Inequality, Output-Inflation Trade-Off and Economic Policy Uncertainty

Publisher: Springer International Publishing

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Abstract

Evidence indicates that positive economic policy uncertainty shocks raise bank lending rate margins. By contrast, the negative economic policy uncertainty shock lowers bank lending rate margins. The counterfactual VAR evidence shows that inflation below 6 % dampens the actual rise in the bank lending rate margins following positive economic policy uncertainty shocks. Thus policymakers should consider that, a large reduction in the repo rate than expected is needed to overcome the mitigating effects of elevated economic policy uncertainty in raising the bank lending rate margins even in a low inflation environment.

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previous chapter The Time-Varying Pass-Through of the Lending Rate Responses to the Repo Rate Changes and Loan Intermediation Mark-Ups

next chapter Does Economic Policy Uncertainty Impact the Pass-Through of the Repo Rate to the Bank Lending Rates?

Indeed, evidence in Francis et al. (2014) indicates that elevated political uncertainty impacts the firms’ level of investments. In addition, elevated political uncertainty influences firms’ costs of bank loans by adding extra basis points on margins. These authors further show that lenders have additional advantage in pricing a borrower’s future political exposure. Moreover, from the credit supply side, those lenders with higher political exposure will demand additional loan margins.

Bloom, N., Stephen, B., & Van Reenen, J. (2007). Uncertainty and investment dynamics. Review of Economics Studies, 74(2), 391–415.CrossRef

Francis, B. B., Hasan, I., & Zhu, Y. (2014). Political uncertainty and bank loan contracting. Journal of Empirical Finance, 29, 281–286.CrossRef

Hlatshwayo, S., & Saxegaard, M. (2016). The consequences of policy uncertainty: Disconnects and dilutions in the South African real effective exchange rate-export relationship (IMF Working Chapter WP/16/113).

Nini, G., Smith, D. C., & Amir, S. (2012). Credit control rights, corporate governance, and firm value. Review of Financial Studies, 25(6), 1713–1761.CrossRef

Pastor, L., & Veronesi, P. (2013). Political uncertainty and risk premia. Journal of Financial Economics, 110(3), 520–554.CrossRef

Title: Do Economic Policy Uncertainty Shocks Impact the Bank Lending Rate Margins?
Authors: Eliphas Ndou
Thabo Mokoena
Publisher: Springer International Publishing
Book: Inequality, Output-Inflation Trade-Off and Economic Policy Uncertainty
Print ISBN: 978-3-030-19802-2

Electronic ISBN: 978-3-030-19803-9

Copyright Year: 2019
DOI: https://doi.org/10.1007/978-3-030-19803-9_29