US Economic Policy Uncertainty and Chinese Macroeconomic Activity: A Nonlinear Approach

Abstract

This paper aims at examining the spillover effects from the US policy uncertainty shocks on the Chinese aggregate variables in recessions and expansions. I adopt a Smooth Transition Vector Auto-Regression (STVAR) model with monthly series. The results from the impulse response functions and forecast error variance decompositions suggest that the US policy uncertainty has a negative impact on the Chinese aggregate variables such as industrial production, inflation rate, and export revenue, which is consistent with the previous studies. The effect is quantitatively significant on the Chinese export revenue. The results from FEVD show that the spillover effects depend on the state of the business cycles. The overall effects of the US EPU shocks on the Chinese industrial production and inflation rate are larger in recessions while the contributions of the US EPU shocks to the Chinese EPU and export are larger in expansions.