Economic Policy Uncertainty Effect on Bank Lending Performance: Evidence from Pakistan

Abstract

Economic policy uncertainty affects decisions of households, businesses, policy makers and financial intermediaries. We have thus examined in this paper the impact of economic policy uncertainty on aggregate bank credit growth in the context of Pakistan’s economy. For the purpose of analysis 11 years monthly data from 2012-2023 has been taken. ARDL analysis and Quartile Regression have been used to examine the effect of EPU and other economic variables on Bank loan capacity. We have observed a significant positive association between loan spreads and EPU index. Together, our results suggest that economic policy uncertainty is an economically important risk factor for banks’ loan pricing. EPU adversely impacts bank stability regardless of countries’ development and income levels. Our empirical work has specific policy implications for banks, regulatory bodies and government agencies for decision-making.

Keywords: Economic Policy Uncertainty, ARDL Analysis, Quantile regression, Banks’ loan pricing, Bank interest rate, Macro Economic Variables.