Relationship between economic policy uncertainty and domestic credits: evidence from the long-span time series for the UK and the USA

Abstract

This paper examines the effects of news-based economic policy uncertainty (EPU) on domestic credit in the United Kingdom and the United States from 1900 to 2020. The Structural Vector Autoregression (SVAR) model results show that the EPU significantly decreases domestic credit both in the United Kingdom and the United States. Further results from the Volatility Spillover model indicate robust evidence of the negative impact of the EPU on domestic credit demand. The high spillover effect comes from the high EPU, which is associated with low domestic credit, and the low EPU is associated with increased domestic credit. The results are robust in different model procedures. The results indicate that consumers decrease durable consumption, and firms follow a wait-and-see strategy during times of higher EPU.