Stabilizing inflation expectations in China: Does economic policy uncertainty matter?

Siming Liu; Mengxin Wang; Yong Tan; Siming Liu; Mengxin Wang; Yong Tan

doi:10.3934/GF.2019.4.429

Green Finance

2019, Volume 1, Issue 4: 429-441. doi: 10.3934/GF.2019.4.429

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Research article

Stabilizing inflation expectations in China: Does economic policy uncertainty matter?

1.
School of Statistics, University of International Business and Economics, Beijing 100029, China
2.
Guangzhou International Institute of Finance, Guangzhou University, Guangzhou 510405, China
3.
Department of Accountancy, Finance and Economics, University of Huddersfield, HD1 3DH, UK

Received: 14 November 2019 Accepted: 08 December 2019 Published: 16 December 2019
JEL Codes: D81, E02, E31

In this paper, we evaluate the impact of economic policy uncertainty shocks on inflation expectations in China by using a MF-VAR approach. We find that China's inflation expectations are sensitive to policy-related uncertainty shocks. Meanwhile, there exist heterogeneous impacts of national economic policy uncertainty shocks on inflation expectations in China. Overall, the inflation expectations in China rise in response to the European, Japanese and China's own uncertainty shocks. Whereas, the reaction of the inflation expectations in China to the uncertainty shocks made by both the US and BRICS (except China and South Africa) is negative. The results also reveal that the policy-related uncertainty shocks are dominant driving force of the inflation expectations in China especially during the post-crisis period. In addition, the contribution of China's domestic uncertainty shocks is remarkably higher than that of foreign uncertainty shocks.
- inflation expectations,
- domestic economic policy uncertainty,
- economic policy uncertainty spillovers,
- MF-VAR model
Citation: Siming Liu, Mengxin Wang, Yong Tan. Stabilizing inflation expectations in China: Does economic policy uncertainty matter?[J]. Green Finance, 2019, 1(4): 429-441. doi: 10.3934/GF.2019.4.429

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Abstract

In this paper, we evaluate the impact of economic policy uncertainty shocks on inflation expectations in China by using a MF-VAR approach. We find that China's inflation expectations are sensitive to policy-related uncertainty shocks. Meanwhile, there exist heterogeneous impacts of national economic policy uncertainty shocks on inflation expectations in China. Overall, the inflation expectations in China rise in response to the European, Japanese and China's own uncertainty shocks. Whereas, the reaction of the inflation expectations in China to the uncertainty shocks made by both the US and BRICS (except China and South Africa) is negative. The results also reveal that the policy-related uncertainty shocks are dominant driving force of the inflation expectations in China especially during the post-crisis period. In addition, the contribution of China's domestic uncertainty shocks is remarkably higher than that of foreign uncertainty shocks.

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