Forecasting Chinese EPU based on financial uncertainty in emerging market economies (EMEs): evidence from six selected East Asian economies

Bing Xu, Mohib Ur Rahman and Haijing Yu

Economic Research-Ekonomska Istraživanja, 2021, vol. 34, issue 1, 628-649

Abstract: While the influential role of Economic Policy Uncertainty (EPU) on economic activity and financial markets is well-documented, little is known about how to forecast EPU, especially in the framework of an emerging market economy (EME). We forecast the newly developed EPU index of China based on financial uncertainty (measured by a realised volatility) of the selected East Asian Economies (EAEs) including ASEAN5 and Hong Kong, having close trade linkages with China, by using LR and DT methods. After controlling for macroeconomic variables, it is evident that the realised volatility of regional EAEs significantly forecasts the EPU of China, except for Thailand. Moreover, comparing the performance of both models based on the accuracy classification score test, LR performs better than DT. Policymakers, who aim to keep and maintain a low level of EPU to achieve effective investment policies and avoid reduced consumer spending, should take into account the findings of this study.

Date: 2021
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DOI: 10.1080/1331677X.2020.1803096

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