Foreign policy uncertainty shocks and US macroeconomic activity: Evidence from China

- We estimate a regime switching STVAR to model spillover effects from China policy uncertainty on US real variables.
- We show that Chinese policy uncertainty shocks impede policy uncertainty and economic activity in the US only during recession periods.
- The contribution of Chinese policy uncertainty shocks in accounting for US macro-variables appears to be non-negligible during phase of busts.
- These effects do not act during normal times.

This paper investigates the spillover effects of economic policy uncertainty (EPU) from China on US real macroeconomic variables in both expansion and recession periods. We use monthly data and estimate a Smooth Transition VAR (STVAR) model over the recent period. We find robust evidence that Chinese uncertainty significantly affects US economic activity during busts while no effect is perceptible during booms. The results also underline that Chinese EPU is a determinant of policy uncertainty, unemployment and industrial production in US.