The real consequences of financial stress: Evidence from China

C. Hueng, Ping Liu and Lirong Wang

Journal of the Asia Pacific Economy, 2023, vol. 28, issue 3, 855-872

Abstract: This paper uses a multi-regime threshold vector autoregressive model to investigate the asymmetric and nonlinear impacts of financial stress on China’s real economy in high- and low-stress regimes. Special attention is paid to the reliability of the measures of financial stress and real activities in China. We find that the response of China’s real economy to a financial stress shock is bigger in high-stress regimes than in low-stress regimes. The negative response to a positive shock is bigger than the positive response to a negative shock. The response to a positive shock is disproportionately larger when the size of the shock increases, but a negative shock does not have this amplifying effect, indicating the danger of a severe financial crisis and the difficulty to revert its damage to China’s real economy

Date: 2023
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DOI: 10.1080/13547860.2021.1897061

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