Economic policy uncertainty in the US and China and their impact on the global markets

• Published in: Economic modelling Vol. 79; pp. 47 - 56
• Main Authors: Zhang, Dayong, Lei, Lei, Ji, Qiang, Kutan, Ali M.
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01-06-2019
• Subjects: Connectedness; Economic policy uncertainty; Global economy; Time varying; Variance decomposition; F62; Economic policy uncertainty; F42; O19; Connectedness; Variance decomposition; G15; Global economy; Time varying
• ISSN: 0264-9993; 1873-6122
• DOI: 10.1016/j.econmod.2018.09.028

The recent US-China trade conflict has caused substantial uncertainty in the global markets. What is the rationale of this conflict? Is the rising of Chinese economy imposing a realistic threat to the US-led post-war international system? Using economic policy uncertainty in each of these two key global economic players as a measure of policy stance, this paper builds a time series model following Diebold and Yilmaz (2014) to estimate the influence of both the US and China on several key international markets, namely, stock, credit, energy and commodity markets. We find that, although China has become more influential, the US's dominant position still holds in all the markets. The results suggest that concerns regarding China's competition with the US in shaping the global world order are more likely to be driven by political factors rather than economic motives.
•This study helps to understand the rationale of recent US-China trade conflicts.•Impacts of economic policy uncertainty on key international markets are evaluated.•China’s global influence has increased, but the US has remained its dominance.•Evidence shows significant shifts in the dynamics of global interactions over time.