Between policy swings and financial shockwaves: Asymmetric impact of economic policy uncertainty on financial stability in high-volatility nations

Abstract

In today's rapidly changing global economy, economic policy uncertainty has become a significant determinant of financial stability. With the increasing complexity and interconnectedness of financial markets, any fluctuations or uncertainties in economic policy can have far-reaching consequences. Ongoing research analyzes the impact of economic policy uncertainty on financial stability in the ten selected nations distinguished by heightened economic policy uncertainty (Argentina, Turkey, Brazil, India, Russia, Pakistan, Colombia, Indonesia, South Africa, and the Philippines). Preceding research has utilized panel data techniques to scrutinize the tie between economic policy uncertainty and financial stability. However, these investigations often failed to account for the fact that not all countries exhibit the same level of connection in this regard. Conversely, this research employs a distinctive approach, ‘Quantile-on-Quantile', to dissect the relationship within individual countries. This approach grants an exhaustive worldwide standpoint and customized foresight specific to each nation. The results indicate that economic policy uncertainty reduces financial stability within distinct sections of the data distribution. In addition, the outcomes emphasize the diverse levels of asymmetry characterizing this relationship across various nations. These findings underscore the significance of policymakers' prudent consideration and meticulous handling of policies related to economic policy uncertainty and financial stability.