Abstract
This paper employs the threshold cointegration methodology to assess the long- and short-run dynamics of asymmetric adjustment between economic policy uncertainty (EPU) of China-India, China-Japan, China-Korea, India-Japan, India-Korea, and Japan-Korea pairs using monthly EPU data ranging from January 1997 to April 2020. The relationship between the EPU pairs is examined in terms of Engle-Granger and threshold cointegrations. The findings provide evidence of long-run threshold cointegration and that the adjustments towards the long-run equilibrium position are asymmetric in the short run for the China-India and India-Japan EPU pairs in M-TAR specification with nonzero threshold values. Also, the results suggest a unidirectional causal relationship between China-India, China-Japan, and India-Korea EPU pairs in the long and short run using the spectral frequency domain causality approach. However, a bidirectional causal relationship between China-Korea, India-Japan, and Japan-Korea pairs exists in the long and short run. Therefore, the findings provide some clues to economic policymakers within the Asian subregion for possible policy uncertainty synergies and spillovers among the Asian countries.
Highlights
Weakening global economic growth in recent years has been attributed to heightened uncertainty in the economic policies of advanced economies
We have investigated the linkages between economic policy uncertainty (EPU) pairs of four Asian countries from January 1997 to April 2020 by examining the cointegration, asymmetric cointegration, and causal relationship in the frequency domain between the EPU pairs of China, India, Japan, and South Korea, allowing for asymmetric adjustments towards long-run equilibrium
Because the Engle-Granger cointegration lacks a threshold adjustment in the long-run, we employed the threshold autoregressive (TAR) and momentum threshold autoregressive (M-TAR) models, following Enders and Siklos [24], to determine the asymmetric response of each EPU in the combination of ChinaIndia, China-Japan, China-Korea, India-Japan, India-Korea, and Japan-Korea EPU models. e TAR and M-TAR models support the threshold adjustment between the EPU pairs, which further discloses asymmetries in the EPU model adjustment process. ough the null hypothesis of no cointegration was rejected for both TAR and M-TAR models, the null hypothesis of symmetric adjustment was not rejected for all models with TAR specification with zero threshold value
Summary
Weakening global economic growth in recent years has been attributed to heightened uncertainty in the economic policies of advanced economies. Global issues such as 1997-98 Asian financial crisis, September 11 terrorist attacks in the United States (US), Gulf War II, 2008 global financial crisis, European sovereign debt crisis, Brexit referendum, and Covid-19 pandemic are perceived to have raised economic policy uncertainty (EPU) with consequential effects on private domestic demand in many economies. Emerging market economies have experienced large swings in business cycles, financial market returns, and macroeconomic fundamentals due to EPU shock transmission from advanced and developed economies.
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