Macroeconomic policy uncertainty shocks on the Chinese economy: a GVAR analysis

ABSTRACT

This article studies the spillovers of economic policy uncertainty (EPU) from developed economies to China in terms of the source, extent and persistence by estimating a global vector autoregressive (GVAR) model with both financial and trade variables acting as the transmission channels. Our findings confirm the existence of international transmissions of policy uncertainty, while the patterns differ markedly. The US EPU appears to be the most significant cause of the fall of export, industrial production, equity price and exchange rate, meanwhile, the EU EPU is also to be blamed for the depreciation of RMB. In contrast to industrial production, which shows the largest negative impact, Chinese inflation increases to a relatively smaller extent with the EPU shocks ranking as the US, Japanese and the EU. Regardless of the minor impact on a long-term interest rate, the short-term interest rate in China reacts positively to the European and US EPU shocks. Despite the independent national monetary policies, EPUs from the EU, Japan and the UK can decrease the Chinese monetary aggregate. In summary, the Chinese economy responds the most to the US EPU, especially to its inflation expectation disagreement component, whereas it responds the least to the UK EPU.

KEYWORDS:

• Uncertainty spillover
• economic policy uncertainty
• global VAR
• Chinese economy

JEL CLASSIFICATION:

• E00
• E60
• F02

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ GVAR is a popular global modelling framework for quantitative policy analysis (e.g. Galesi and Sgherri 2009; Galesi and Lombardi 2009; Cesa-Bianchi et al. 2011; Fielding, Lee, and Shields 2012; Favero 2013; Garratt, Lee, and Shields 2014).

² Source: www.policyuncertainty.com.

³ In terms of the stationary distribution of natural and labour resources along with the global development, we consider either the trade weights or the PPP weights remaining at stable levels over the research period, so that the calculation year range selected can be broadened throughout 1999–2012.

⁴ Given the importance of the US financial variables in the global economy, the US-specific foreign financial variables, $equit{y}_{it}^{\ast }$, $short{r}_{it}^{\ast }$ and $long{r}_{it}^{\ast }$, were not included in the US model as they are unlikely to be long-run variables in respect to the US domestic financial variables.

⁵ Since the aim of this article is to distinguish the policy uncertainty shocks to the Chinese economy, especially when compared with the responses of other economies, we do not take the cointegrating restriction and bootstrap procedure into account, which can eventually generate the dashed lines representing bootstrap error bounds.

⁶ In the body, we do not demonstrate the comparative results for space-saving because no significant differences are observed.

⁷ Since the shrinkage parameter settings cover many points from 0 to 1, we only mention the necessity of this robustness issue without listing all the data.

Additional information

Funding

This research was financially supported by the National Natural Science Foundation of China [projects number 71401193, 71371022, and 71173008]; Key Projects of Philosophy and Social Sciences Research of Ministry of Education [project number 14JZD016]; and the Program for Innovation Research in Central University of Finance and Economics.