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Exploring the relationship between China's economic policy uncertainty and business cycles: Exogenous impulse or endogenous responses?

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  • Yujia, Li
  • Zixiang, Zhu
  • Ming, Che

Abstract

This paper explores China's endogeneity of economic policy uncertainty (EPU). Previous studies have disagreed on the causal relationship between uncertainty and the business cycle. By using shock-based restrictions, we identify structural shocks and investigate the endogeneity of China's EPU index. The findings suggest that an increase in EPUs is more likely to cause fluctuations in the Chinese economy than the reverse. The paper also uncovers spillovers of China's EPU on the US EPU, indicating a national strategy at play. In the long run, EPU shocks in China account for at least 22% of China's economic activity variation and 30% of the US EPU variation. These findings remain consistent when accounting for the COVID-19 period, adopting heteroskedasticity identification schemes, and using alternative EPU indexes.

Suggested Citation

  • Yujia, Li & Zixiang, Zhu & Ming, Che, 2024. "Exploring the relationship between China's economic policy uncertainty and business cycles: Exogenous impulse or endogenous responses?," Emerging Markets Review, Elsevier, vol. 58(C).
    • Handle: RePEc:eee:ememar:v:58:y:2024:i:c:s156601412300095x
    DOI: 10.1016/j.ememar.2023.101090
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    More about this item

    Keywords

    Economic policy uncertainty; Shock-based restrictions; Cyclical fluctuations;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E01 - Macroeconomics and Monetary Economics - - General - - - Measurement and Data on National Income and Product Accounts and Wealth; Environmental Accounts
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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