Uncertainty shocks and monetary policy: evidence from the troika of China's economy

ABSTRACT

Growth in China's economy is driven by the troika consumption, investment and export. This paper examines the effect of uncertain events such as the global financial crisis in 2008, and the COVID-19 pandemic on the troika. Based on the construction of a new uncertainty index of China's economy, the relationship between uncertainty and growth in the troika is examined by using a TVP-VAR model. Results show that fluctuations in the uncertainty index during the COVID-19 epidemic had the greatest negative impact on consumption and investment at a magnitude of -0.27, notably greater than that during the period of the global financial crisis. The negative impact on export reached -0.73, smaller than that during the global financial crisis. Against a backdrop of the novel coronavirus epidemic, it is also found that expansionary monetary policies can have a relatively large impact on investment and export, reaching 1.75 and 1.57 respectively, while short-term impact on consumption is relatively weak, averaging at 0.51.