Economic policy uncertainty and China’s growth-at-risk

Abstract

The impact of policy uncertainty on China’s economic activity has received considerable attention. To appraise the role of economic policy uncertainty (EPU) in China’s economic downturns, we estimate the predictive distribution of China’s GDP growth as a function of EPU from 1996Q1 to 2020Q2, using quantile regression and fitted skew-t distribution. We find that the entire predicted distribution of GDP growth conditional on the EPU index evolves over time beyond the central tendency. The EPU index alters the predicted distribution’s higher moments, amplifies the growth tail risk, and improves the model’s forecast performance; this could serve as a basis for preemptive action. Our results are robust across other alternative output and EPU variables.