The Casual Relationship between China’s Financial Stress and Economic Policy Uncertainty: A Bootstrap Rolling-Window Approach

Abstract

This study explores the causal relationship between China's financial stress and economic policy uncertainty. Considering structural changes in two series, we find that long-run nexus using full-sample data are unstable, suggesting that causality tests cannot be relied upon. Then, we employ a time-varying rolling window estimation to reexamine the dynamic causalities. The empirical results show that financial stress has both positive and negative impacts on economic policy uncertainty in several sub-periods, meanwhile, economic policy uncertainty has the same effects on financial stress in China, which illustrates that the time-varying causality exists between two variables. These findings indicate that the government should make the formulation of macroeconomic policies stable and strengthen the supervision of financial markets, including the guidance of the public reasonable expectations, which are critical to the economic development in China.

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