How the fiscal and monetary policy uncertainty of China respond to global oil price volatility: A multi-regime-on-scale approach

Abstract

In the beginning of 2020, significant economic recession and financial shocks directly caused by the oil price war and the outbreak of COVID-19 epidemic appear, making the connection between oil price and policy uncertainty a significant topic, especially for China, the largest emerging market and second largest oil consumer. With the monthly data of WTI oil price, China's fiscal policy uncertainty (FPU) index and monetary policy uncertainty (MPU) index from January 2000 to August 2020, this paper detailedly investigates how China's FPU and MPU respond to global oil price volatility in different oil price volatility regimes and time scales. The empirical results expose that: (1) China's FPU and MPU volatility would positively respond to WTI volatility in the low oil price volatility regime, while in the high oil price volatility regime, the FPU response is insignificant and MPU response is only significant and negative in the scale 3–4 (8–16 and 16–32 months); (2) Only in the middle-long term of low oil price volatility regime will the WTI volatility significantly respond to China's FPU and MPU volatility; and (3) The FPU and MPU volatility responses are more violent in high oil price volatility regime. Our diversified findings can be important reference for diversified market participants including policy uncertainty researchers, government policy-makers and global investors interested in the Chinese market.