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. 2024 May 16;10(10):e31384.
doi: 10.1016/j.heliyon.2024.e31384. eCollection 2024 May 30.

Economic policy uncertainty and financial system efficiency

Arfia Aman  1 , Shaista Anwar  2 , Muhammad Atif Khan  3 , Hossam Haddad  4 , Nidal Mahmoud Al-Ramahi  4 , Mohammed Arshad Khan  5
Affiliations

Economic policy uncertainty and financial system efficiency

Arfia Aman et al. Heliyon. .

Abstract

Economic policy uncertainty (EPU) adversely affects financial system functioning with potentially critical repercussions for economies and corporations worldwide. Financial system efficiency (FSE) has a vital influence on fostering optimal economic growth and development; however, the impact of EPU on FSE remains under-explored. This study investigates the effect of EPU on FSE along with its components financial institution efficiency (FIE) and financial market efficiency (FME). Using data from 22 countries over a 20-year period (2002-2021), our analysis reveals a significant negative effect of EPU on FSE, FIE and FME. Notably, our split-sample analysis highlights the accentuated adverse effects of EPU in high-EPU regimes, emphasising the importance of vigilance during periods of elevated policy uncertainty. We conduct a series of sensitivity tests, including alternative measures of EPU, FSE, FIE and FME, and apply two-stage least squares and two-step dynamic system generalised method of moments estimators and introduce additional control variables. These tests consistently reaffirm the core conclusions of our study. Finally, we discuss the implications of our findings for policymakers.

Keywords: Economic policy uncertainty; Financial institution efficiency; Financial market efficiency; Financial system efficiency.

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Conflict of interest statement

The authors declare that they have no known competing financial interests or personal relationships that could have appeared to influence the work reported in this paper.

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