A Study On The Non-linear And Time-varying Interaction Between Policy Uncertainty And FDI Inflows In China

Global trade disputes have gotten worse in the twenty-first century.The U.S.subprime mortgage crisis in 2007 triggered the worldwide financial crisis in 2008,then came the European sovereign debt crisis,leading a significant devaluation of the Euro.The world economy has slowed down,and countries have introduced policies leading to increased economic policy uncertainty.Widening access to financing and increasing investment inflows have become the choice of many countries,especially for many developing countries.As the world’s largest developing country,China still has a great demand for the foreign investment.What’s more,Chinese government still faces huge policy challenges in a world economy with many opportunities and serious challenges.Therefore,studying the causality between economic policy uncertainty and the foreign direct investment inflows(IFDI)is of great importance to China.China has been actively engaged in overseas commerce since joining the World Trade Organization,and has progressively risen into a global trade giant.In the years of 2018-2019,the Sino-U.S.trade war erupts,and trade policy is facing great uncertainty.It is also vital to examine the relationship between trade policy uncertainty and IFDI.Firstly,this paper describes the mechanism of economic policy uncertainty affecting IFDI according to related theories and relevant literature.Then,the stationary data after first difference is used to test the causality of two variables by full-sample Granger causality test based on traditional vector autoregression model.The BDS(Brock,Dechert and Scheinkman)test confirms that the relationship between the two variables should be non-linear,so the quantile causality test is adopted to test the causality.Finally,the parameter stability test indicates the presence of structural mutations in the two variables,which would make the causality between the two variables non-constant.Therefore,the Granger bootstrap rolling window causality test is implemented to examine the causal nexus between the two variables over time.The outcomes suggest that: firstly,the quantile causality test indicates that economic and trade policy uncertainty have impacts on the IFDI at some quantile levels.In turn,IFDI affects the level of economic and trade policy uncertainty in the country.Secondly,the Granger bootstrap rolling window causality test expresses there is a time-varying causality of economic policy uncertainty on the IFDI,mostly a negative impact.Nevertheless,there is a positive correlation observed between the periods of the U.S.subprime crisis.In addition,there is an inverse and time-varying effect of the IFDI on trade policy uncertainty.Conversely,IFDI has a positive and time-varying impacts the trade policy uncertainty.Therefore,it can be concluded that there is a mutual causality between the policy uncertainty and IFDI.