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The real consequences of financial stress: Evidence from China

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  • C. James Hueng
  • Ping Liu
  • Lirong Wang

Abstract

This paper uses a multi-regime threshold vector autoregressive model to investigate the asymmetric and nonlinear impacts of financial stress on China’s real economy in high- and low-stress regimes. Special attention is paid to the reliability of the measures of financial stress and real activities in China. We find that the response of China’s real economy to a financial stress shock is bigger in high-stress regimes than in low-stress regimes. The negative response to a positive shock is bigger than the positive response to a negative shock. The response to a positive shock is disproportionately larger when the size of the shock increases, but a negative shock does not have this amplifying effect, indicating the danger of a severe financial crisis and the difficulty to revert its damage to China’s real economy

Suggested Citation

  • C. James Hueng & Ping Liu & Lirong Wang, 2023. "The real consequences of financial stress: Evidence from China," Journal of the Asia Pacific Economy, Taylor & Francis Journals, vol. 28(3), pages 855-872, July.
    • Handle: RePEc:taf:rjapxx:v:28:y:2023:i:3:p:855-872
    DOI: 10.1080/13547860.2021.1897061
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