The dynamic connectedness between macroeconomic uncertainty and commodity volatility: evidence from China

We investigate the dynamic connectedness between Chinese macroeconomic uncertainty and volatility in Chinese commodity markets, controlling for international macroeconomic uncertainty, international commodities and Economic Policy Uncertainty Index (EPU), and adopting an approach that combines the Diebold – Yilmaz connectedness measure with the time-varying VAR model. Our empirical results indicate that Chinese macroeconomic uncertainty was the main net transmitter of the commodities commonly used in manufacturing, such as chemical engineering materials and non-ferrous metal, over the whole sample period, and had a considerable impact on these commodities due to the production shutdown caused by COVID-19 containment measures. This indicates the important role of Chinese macroeconomic uncertainty on the supply and demand sides. As China is the largest manufacturing country, macroeconomic uncertainty in this nation has had a significant and increasing influence on international commodities, especially when there occur events that severely affect global production activity. However, the impacts of EPUs on commodity volatilities were limited compared with the effects of Chinese macroeconomic uncertainty, especially during the COVID-19 pandemic, demonstrating that macroeconomic uncertainty, which reflects uncertainty about future aggregate supply and demand, plays a more crucial role in driving the volatility of commodities with stronger production attributes.