Economic policy uncertainty serves as an underlying influence on financial markets, consumer behavior and investment choices. This study investigates the dynamic relationships between China’s Consumer Confidence Index (CCI) and Economic Policy Uncertainty (EPU), using a quantile-on-quantile (QQ) connectedness approach. It aims to uncover the extent to which both variables interact across different market conditions, with a particular focus on extreme economic scenarios, such as the 2008 global financial crisis and the COVID-19 pandemic.
The study adopts a novel QQ connectedness framework to analyze the bidirectional spillover effects between EPU and CCI. This methodology allows for a thorough appraisal of how each quantile of EPU affects each quantile of CCI and vice versa, capturing both direct and inverse relationships. Employing monthly data from January 2000 to December 2024, the analysis applies a quantile vector autoregressive (QVAR) model and generalized forecast error variance decomposition (GFEVD) to measure dynamic connectedness, revealing asymmetric and nonlinear interactions.
The results highlight significant spillover effects, particularly in extreme market conditions. We find that CCI primarily functions as a net shock receiver, while EPU serves as a net shock transmitter. High levels of EPU are associated with declines in CCI, indicating an inverse association between the two variables. In contrast, under stable economic conditions, EPU and CCI move together in a direct relationship, with greater confidence corresponding to lower uncertainty. The findings emphasize the asymmetric nature of this nexus, demonstrating that households are more reactive to uncertainty shocks, which can lead to reductions in spending and increased precautionary savings.
The study provides valuable insights for policymakers, businesses and investors in China. It highlights the importance of minimizing abrupt policy changes to maintain economic stability and consumer confidence. Policymakers in China should prioritize transparency and forward-guidance strategies to mitigate the negative effects of policy uncertainty on household sentiment. Enhancing predictability in China’s economic policies can support sustainable growth by fostering confidence in financial and labor markets.
Our research advances the literature by applying the QQ connectedness framework to conduct a comprehensive analysis of the bidirectional relationship between EPU and CCI. In contrast to traditional quantile approaches, this method reveals the nonlinear, asymmetric and reciprocal dynamics between the two proxy variables, thereby offering deeper insights into how policy uncertainty and consumer sentiment interact across diverse economic conditions. The findings hold particular significance for China’s policy-driven economy, where they provide practical guidance for the formulation of stability-oriented policies aimed at alleviating uncertainty and reinforcing consumer confidence.
