The Time-Varying Relationship Between Economic Policy Uncertainty,Financial Stability And Economic Volatility

At present,the "de-realisation" of the economy has become an important characteristic of the macroeconomic developments in China.Along with the occurrence of major domestic and international emergencies,China’s government frequently changes its economic policies,leading to a pervasive uncertainty in the socio-economic environment.Against this background,the linkage between economic policy uncertainty,financial stability and economic fluctuations has become a hot issue of study in academic circles,and an important reference for regulators to grasp the balance between "risk prevention" and "stable growth".However,the uncertainty generated by frequency of economic policies can influence the expectations of micro-organisms,which may then lead to deviations in macro-control.Therefore,a comprehensive understanding of the dynamic time-varying relationship between economic policy uncertainty,financial stability and economic fluctuations can facilitate the reduction of the adverse effects of economic policy uncertainty,manage financial risks,promote the synergy between the real economy and the virtual economy,and achieve the stable and healthy development of China’s national economy.This thesis first sorts out the concepts of economic policy uncertainty,financial stability and economic fluctuations at home and abroad and their relationship,providing useful research ideas and theoretical basis for follow-up research.Second,when the government responds to irregular event shocks,frequent changes in macroeconomic regulation policies lead to high uncertainties and financial markets are affected.Therefore,this thesis uses the MS-VAR model to realize the division of economic policy uncertainty and build a comprehensive China’s financial stability index of domestic and foreign financial market conditions analyzes the phased characteristics of my country’s economic policy uncertainty and financial stability.Then,based on the macroeconomic evolution framework,the TVP-SV-VAR model is used to systematically analyze the dynamic correlation characteristics among economic policy uncertainty,financial stability and economic fluctuations.Theoretical elaboration and empirical results show that:(1)There is a phase characteristic of economic policy uncertainty in China,that is,the economic and social operation has a significant inertial quality in a certain period of time,and economic policy uncertainty is on the rise;(2)There is a two-way Granger causality between China financial stability index and inflation;(3)There is a time-varying dynamic relationship among economic policy uncertainty,financial stability and economic fluctuations,and there are heterogeneous influence relationships at different times and points.First of all,due to the "stickiness" of prices in the financial system,the impact of economic policy uncertainty on financial stability is mainly in the medium and long term,that is,it has a "time lag",and the increase in the level of economic policy uncertainty has a negative impact on financial stability.Second,the rise of economic policy uncertainty has exacerbated economic fluctuations,and this impact is mainly in the short and medium term.In addition,as the economic situation continues to change,the shock effect is stronger from 2002 to 2012,weaker from 2013 to 2017,and significantly stronger after 2018.Due to the existence of financing constraints and market expectations,the impact of financial stability on economic volatility is dominated by the negative short-term shock effect,and with the macro-control policies implementation,this negative shock effect in the medium and long-term declines.And economic fluctuations have a long-term negative impact on financial stability,that is,rising economic fluctuations will weaken the level of financial stability.And with the development of virtual economy,China financial stability and economic fluctuations presents the time-varying linkage characteristics of mutual influence.Overall,rising levels of economic policy uncertainty will change expectations and credit constraints in the short run,weakening the level of financial stability and exacerbating economic volatility,with heterogeneous impact relationships across lags and different points in time as the macroeconomic situation changes.Finally,combined with the research conclusions,the following suggestions are put forward:(1)To maintain the stability and continuity of macroeconomic policies,the government should fully consider the negative impact of uncertainty on economic fluctuations when formulating and implementing macro-control policies;(2)Construct a financial stability early warning index based on economic policy uncertainty,so as to detect in advance,timely prevent and effectively resolve unfavorable factors that threaten financial stability under a relatively high level of economic policy uncertainty;(3)Collaborate with multiple parties to actively respond to the impact of economic policy uncertainty.Policy makers and implementers maintain the stability and regularity of policies,and incorporate financial stability into macro-control objectives;market micro-entities should improve their confidence and professionalism to make accurate decisions and dynamically adjust their decision-making behavior in the short-,medium-and long-term changes of the macroeconomic situation.