The Impact Of Economic Policy Uncertainty On The Business Cycle Fluctuations

After the outbreak of the international financial crisis,the global economy has suffered a lot.The world economy is still stuck in a quagmire,and it is difficult to recover.The Nineteenth National Congress of the Communist Party of China reported that the world is in a period of great development,great changes and great readjustment.With the deepening development of world multipolarity,economic globalization,social informatization and cultural diversity,the world is confronted with greater uncertainty.Economic policy uncertainty has gradually become the main manifestation of uncertainty,and its impact on macroeconomic consequences has aroused great concern and attention of researchers and policy makers.Business cycle fluctuation is an eternal topic in the field of macroeconomics.In order to promote sustainable and healthy development of national economy,we should pay great attention to mitigating business cycle fluctuations.From the perspective of economic policy uncertainty,studying its impact on the business cycle fluctuations is helpful to enrich the existing economic theory.Meanwhile,it gives new ideas for suppressing the business cycle fluctuations and does good to forming an integrated,inclusive and pluralistic world.Therefore,this topic has important theoretical significance and practical value.According to the existing research,the economic policy uncertainty shows obvious spillover effects.However,the present researches pay little attention to the specific direction and size of the spillover effect,the heterogeneity of the impact on the business cycle fluctuations,the transmission mechanism at home and abroad,the impact of economic policy uncertainty differences on the international business cycle synchronizatio,and so on.The inquiry of these problems just finds the logical starting point of this topic,and at the same time,it is also the place where this paper can expand and innovate.We conduct theoretical analysis from the perspectives of domestic transmission and international transmission,and analyze the transmission mechanism of economic policy uncertainty affecting business cycle fluctuations in an all-round and multi-level way.From the perspective of domestic transmission,economic policy uncertainty mainly changes the expectations of economic actors through real option effect,financial friction effect,and precautionary savings effect,then affects their economic decision-making,leading to fluctuations in consumer demand and investment demand,and ultimately causes the business cycle fluctuations.From the perspective of international transmission,at the first time,the economic policy uncertainty affectsdomestic open economic sectors,then spill to foreign open economic sectors through import and export trade,and then spread to foreign non-open economic sectors through industrial chain.At the same time,the spillover effect of economic policy uncertainty affects the level of foreign economic policy uncertainty.Under the double-pinch attack,it produces obvious multiplier effect,and the effect of economic policy uncertainty on the fluctuation of economic cycle is more serious.According to the economic policy uncertainty index,the global index has risen and fallen sharply in the past three years,and the frequency and range are far from historical level.We are facing increasingly severe uncertainty problems.On the whole,the economic policy uncertainty in the major developed countries such as the United States,Japan and UK shows obvious convergence,and the linkage effect is significant.The level of economic policy uncertainty in BRICS is much higher than that of developed countries,and the resistance to risks and uncertainties in developing countries is not as good as that of developed countries.HP filter is used to extract the cyclical components.According to the measured results,the trough depth of the global economic cycle is far greater than the peak,showing obvious characteristics of steep decline and slow rise.The contraction stage of economy from prosperity to recession is relatively rapid,and the expansion stage from recession to prosperity is relatively slow.From the correlation analysis of economic policy uncertainty and business cycle fluctuations,there is a long-term equilibrium relationship between them,and there is obvious heterogeneity between countries.In order to further quantitatively analyze the domestic transmission of economic policy uncertainties affecting business cycle fluctuations,we use the data of 14 major countries in G20 Group from January 2003 to February 2018,and apply of the PVAR model and the panel fixed effect model to make an empirical demonstration.The results show that:(1)In countries with different levels of economic development,the response time and range of economic cycle fluctuation to economic policy uncertainty are different,and the impact on economic cycle fluctuation is the largest and lasts for a long time in contraction period.(2)The fourth-order lag of economic policy uncertainty has the greatest impact on the business cycle fluctuations.One year after,the economic policy uncertainty has obviously aggravated the fluctuation of the economic cycle.(3)The impact in developing countries is much higher than that in developed countries,and the former is about 2.42 times higher than the latter.(4)It has little effect on the business cycle fluctuations in the expansion period,mainly aggravating in contraction period,which confirms the existence of the uncertainty trap referred to by Fajgelbaum et al.(2017).(5)The monetary policy uncertainty is mainly manifested in the immediate positive impact,while the uncertainty of fiscal policy ismainly manifested in the lagging positive impact,and the impact intensity of the former is far greater than the latter.There is obvious spillover effect in the economic policy uncertainty.Its size and direction should be further discussed.Applying of Diebold & Yilmaz(2012)methodology,based on generalized prediction error variance decomposition,we measure the spillover effects of economic policy uncertainty in 14 countries,including the United States,UK,China,France and so on.The spillover effect is mainly reflected in the form of volatility spillover.The overall spillover index is48.09%.The United States has the greatest spillover effect on other members.The spillover effect of China on other members is higher than that from other members.The spillover effect shows obvious time-varying.The overall spillover effect of developed countries is significantly stronger than that of developing countries.The spillover effect may be more sensitive to emergencies,but more slow to anticipate world events.In order to deeply and carefully analyze the international transmission process of economic policy uncertainty affecting economic cycle fluctuation,we take the United States,the country with the largest spillover effect,as an example,and use the GVAR model to prove it.From the empirical results,the economic cycle fluctuations of the world's major economies are mainly reflected in the long-term negative response to US economic policy uncertainty.Although there are obvious positive responses in individual countries,the duration is very short.Compared with major developed countries(regions),developing countries,such as BRICS,respond more quickly to the economic policy uncertainty in the US,with greater speed and more volatility.As one of the main characteristics of the business cycle,economic cycle synergy is a prerequisite for the joint implementation of international monetary policy.We use simultaneous equation model to study the impact of economic policy uncertainty difference(i.e.the relative value of economic policy uncertainty)on the international business cycle synchronization.The difference of economic policy uncertainty mainly affects the economic cycle synergy between two countries by changing the flow direction of investment and trade.The empirical results show that the difference of economic policy uncertainty has a significant negative impact on economic cycle synergy and bilateral trade,a significant positive impact on the intensity of bilateral direct investment,a positive indirect impact on economic cycle synergy through trade channels and investment channels.Economic policy uncertainty has been rising year after year.It has led to a great discount in the implementation of various economic policies,disturbed public expectations and damaged the smooth operation of the economic system.Especially the existence of spillover effect,the contagiousness is strong,and its macroeconomicconsequences are easy to spread from one country to another,resulting in a loss for both sides of the situation.Therefore,we should reduce the level of economic policy uncertainty by strengthening the construction of legislative system,and paying attention to the stability and sustainability of economic policy.We should enhance the ability to resist uncertain shocks by promoting the development of real industry and innovation,to stabilize expectations and ensure the smooth,healthy and sustainable operation of the economic system.