Revisiting the Impact of US Uncertainty Shocks: New Evidence from China’s Investment Dynamics

Meng Yan () and Kai Shi ()
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Meng Yan: Policy and Economics Institute, China Academy of Information and Communications Technology
Kai Shi: Northeast Normal University

Open Economies Review, 2024, vol. 35, issue 3, No 2, 457-495

Abstract: Abstract This paper investigates the impact of US uncertainty shocks on China’s macroeconomy with a focus on the dynamic response of investment. Using a structural vector autoregression (VAR) model, we find that the wait-and-see mechanism of aggregate investment in the face of heightened US uncertainty disappears in China. Robust evidence confirms that the increase in state-owned enterprises’ investment in response to heightened uncertainty explains this puzzle, while private-owned enterprises’ investment decreases as expected. We apply regime-dependent local projections to link uncertainty shocks with credit regimes to explore whether the impact of US uncertainty shocks on investment in China has varied over time in connection with the states of bank loans. The empirical results support a positive response of state-owned enterprises’ investment to increased US uncertainty during the tightening of medium- and long-term bank loans but a negative reaction when short-term bank loans are tightening. Finally, we show that economic policy uncertainty conveying political signals leads to a decline in state-owned enterprises’ investment. Overall, this paper provides richer empirical evidence on the investment-uncertainty nexus.

Keywords: Uncertainty shocks; Wait-and-see dynamics; Structural VAR; Local projections; State-owned enterprises; Credit regimes (search for similar items in EconPapers)
JEL-codes: C32 D80 E32 E44 F44 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s11079-023-09734-5

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