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What are the effects of financial regulation policy uncertainty (FRPU) on the business cycle, monetary policy and lending spreads? Evidence reveals that banking sector financial frictions as measured by the FRPU and lending rate margins affect the business cycle fluctuations and the transmission of monetary policy settings. In addition, the FRPU shocks, which capture uncertainty about regulation and supervisory issues, contributed significantly to the reduction in credit extension. Furthermore, the instalment rate margins fluctuations are self-induced relative to those induced by FRPU. This evidence is consistent with the bank’s internal reassessment of the riskiness of certain types of bank lending and clients, and changes in banks’ business strategies. Such practices can affect the intermediation of credit and also impede the desired easing effects of monetary policy on the quantities or volume of new loans. Nodari (2014) suggests that the FRPU adverse effects imply that policymakers should pay considerable attention to the design of financial regulation from the credibility and policy management perspectives. This is because lack of transparency in the policy design can have adverse macroeconomic effects. Hence, while the trade-off exists between policy correctness and decisiveness, there should be no ambiguity in policies on which many economic agents depend on to engage in purposeful production and spending decisions.
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Baker, R. S., Bloom, N., Canes-Wrone, B., Davis, S. J., & Rodden, J. (2014). Why Has US Policy Uncertainty Risen since 1960? American Economic Review, American Economic Association, 104(5), 56–60.
Baker, S. R., Bloom, N., & Davis, S. J. (2016). Measuring Economic Policy Uncertainty. The Quarterly Journal of Economics, 131(4), 1593–1636.
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Chami, R., & Cosimano, T. F. (2010). Monetary policy with a touch of Basel. Journal of Economics and Business, 62, 161–175. CrossRef
Hlatshwayo, S., & Saxegaard, M. (2016). The Consequence of Policy Uncertainty: Disconnects and Dilutions in the South African Real Effective Exchange Rate-Export Relationship. IMF Working Paper WP/16/113.
Nodari, G. (2014). Financial regulation policy uncertainty and credits spreads in the US. Journal of Macroeconomics, 41(C), 122–132.
Walentin, K. (2014). Business cycle implications of mortgage spreads. Journal of Monetary Economics, 67, 62–77. CrossRef
- Financial Regulation Policy Uncertainty, Lending Rate Margins and Credit Growth
- Chapter 14
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