The effects of economic policy uncertainty on China's economy: evidence from time-varying parameter FAVAR

This article explores the effects of China's economic policy uncertainty (EPU) on its fiscal policy, monetary policy and a wide range of macro-economic variables using a time-varying parameter FAVAR model. Based on monthly data from 07/2003 to 08/2017, the time-varying structure of the model al...

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Bibliographic Details
Published inApplied economics Vol. 52; no. 29; pp. 3167 - 3185
Main Authors Ren, Yinghua, Guo, Qing, Zhu, Huiming, Ying, Wanming
Format Journal Article
LanguageEnglish
Published London Routledge 20.06.2020
Taylor & Francis Ltd
Subjects
Bonds
Economic analysis
Economic crisis
Economic growth
Economic policy
Economic policy uncertainty
Economic theory
Financial market
Fiscal policy
Foreign exchange rates
Investments
Macro-economy
Monetary policy
Real estate
Savings
Securities markets
Time-varying parameter FAVAR
Uncertainty
China
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Summary:This article explores the effects of China's economic policy uncertainty (EPU) on its fiscal policy, monetary policy and a wide range of macro-economic variables using a time-varying parameter FAVAR model. Based on monthly data from 07/2003 to 08/2017, the time-varying structure of the model allows us to capture the time-varying characteristics of the macro-economic variables and which channel is relevant. Empirical results reveal that the reaction of monetary and fiscal policies to EPU is highly asymmetric across macro-economic circumstances. Loose monetary and fiscal policies are adopted in response to EPU shocks during the financial crisis, while policies are moderately tightened after the crisis. The China Interbank Offered Rate (Chibor) responds more sensitively and severely than M2 to EPU shocks. Additionally, EPU shocks have a significant and negative impact on economic growth, consumption, exchange rates, bonds and the stock market, but showing a positive impact on credit, real estate and fixed asset investment (which might be due to China's special economic market environment and the high investment return). The results indicate that EPU shocks significantly affect macroeconomic fundamentals through precautionary savings and financial market channels but lose their effectiveness through a 'real options' effect.
ISSN:0003-6846
1466-4283
DOI:10.1080/00036846.2019.1707475