Does U.S. Economic Policy Uncertainty Influence Chinese Domestic Inflation?: Evidence from China’s 31 Provinces

Abstract

Purpose - This paper empirically analyzed how China’s domestic inflation responds to foreign uncertainties, especially U.S. economic policy uncertainties. This paper helps to fill the gap in the research on the impact of one country’s economic uncertainty on the others economy. Design/Methodology/Approach - In this paper, we were first to collect disaggregated data on China’s 31 provinces from Q1 2001 to Q4 2021, adopting the nonlinear autoregressive distributed lag (NARDL) approach, to study the impact of U.S. economic policy uncertainty (EPU) on Chinese inflation. Given that the economic structures of China’s 31 provinces are different, such as the level of economic development, industrial structure, economic scale, population scale, and so on, this paper uses China‘s regional data for the first time. We employ the nonlinear autoregressive distributed lag (NARDL) approach proposed by Shin et al. (2014), which has recently attracted attention. Findings - The main findings are as follows. First, the impact of U.S. EPU on inflation in China’s provinces is prominently presented by the short-run (26 provinces) versus the long-run (19 provinces). Second, an increase (decrease) in U.S. EPU causes a decrease (increase) in Chinese inflation in the long-run. Third, short-run asymmetry in U.S. EPU was demonstrated in 20 provinces, and long-run asymmetry was demonstrated in 17 provinces. Moreover, the characteristics of asymmetry develop from short-run to long-run in 15 provinces. Research Implications - The estimation result of the NARDL model shows that the long- and short-run asymmetric effects of the U.S. EPU on domestic inflation are not exactly the same in terms of China’s 31 provinces. This paper also suggests that province-specific phenomena should not be ignored when the Chinese government formulates policies to deal with foreign uncertainty.