Time-frequency relationship between economic policy uncertainty and financial cycle in China: Evidence from wavelet analysis

Abstract

Global events like the Sino–American trade war have renewed interest in the implications of economic policy uncertainty (EPU). Previous literature largely neglect time–frequency dependencies between EPU and macro–financial factors. We employ wavelet methods to examine how EPU interacts with total credit, housing prices, stock prices, and GDP in China, respectively. We find that China's short– and medium–term financial and business cycles have been recovering. Still, the long–term components remain in the contraction phase, partly due to increasing EPU. Moreover, the correlation and the lead–lag relationships between EPU and the macro–financial variables are frequency–dependent and time–varying.