Impulse Response of Economy Policy Unstability Dynamics to Monetary Policies: VAR Model Analysis

The study investigates the impact of monetary policy on economy policy uncertainty with VAR for time series to discuss the policy implications for China. Results show that EPU (Economic Policy Uncertainty) responses the most strongly to itself and the impact lasts the shortest, showing that the EPU of last period has the most important influence to EPU of the current period. EPU responses least strongly to the currency amount but the influence continue the longest. Fullwork codes

The study applied Vector Autoregressive (VAR) methodology for the time-series data from 2002 to 2022 to test impacts of changes in inflation, real money supply and interest rate on the economy policy uncertainty reflected by the standardized scaled frequency counts of economy policy uncertainty characters on newspapers’ monthly series. The study showed that the only M2 is stationary at lag first difference I(1) and all other variables are stationary after CPI deflation at 1% significance level. Trace test indicates at least one cointegrating equations at the 5% significance level. The study also conducted the robustness test with economy policy uncertainty from other resource than the main experiment, and the results are robust under the test.

The conclusion of the research is that, EPU (Economic Policy Uncertainty) responses the most strongly to itself and the impact lasts the shortest; secondly strongly to bond and inflation, as the decrease-increase fluctuates due to one unit of shocks are less severe but last longer, diminish until up to 5 months; least strongly to the currency amount but the influence continue up to 6 months. Therefore, when government want to stabilize media economy policy uncertainty, the government should pursue economic growth by maintaining the inflation rate and interest rate in the long term.