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<p>This paper constructs a novel External Uncertainty Composite Index (EUCI) for China, integrating geopolitical, economic, and financial sources of external risk. Dynamic weights for the EUCI are endogenously determined using a time-varying parameter vector autoregressive (TVP-VAR) model, reflecting the evolving cumulative impact of distinct uncertainty shocks on China’s economy. Employing a nonlinear autoregressive distributed lag (NARDL) model, we then assess the EUCI’s asymmetric and time-varying effects on domestic inflation and its forecasting performance. The empirical findings reveal that the EUCI exerts a significant, asymmetric, and temporally dynamic influence on inflation. Notably, the EUCI consistently outperforms individual uncertainty measures in forecasting inflation. These results underscore the EUCI’s utility as a comprehensive indicator for inflation analysis and prediction in an environment of heightened global uncertainty, providing critical insights for policymakers.</p>

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Reimagining External Uncertainty: a Dynamic Composite Index and its Asymmetric Inflationary Footprint in China

  • 期刊论文

  • 发表日期：

    2026年3月28日

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  • Lijuan Li,
  • Chentong Sun,
  • Muneer M. Alshater,
  • Yanshuang Li

摘要

This paper constructs a novel External Uncertainty Composite Index (EUCI) for China, integrating geopolitical, economic, and financial sources of external risk. Dynamic weights for the EUCI are endogenously determined using a time-varying parameter vector autoregressive (TVP-VAR) model, reflecting the evolving cumulative impact of distinct uncertainty shocks on China’s economy. Employing a nonlinear autoregressive distributed lag (NARDL) model, we then assess the EUCI’s asymmetric and time-varying effects on domestic inflation and its forecasting performance. The empirical findings reveal that the EUCI exerts a significant, asymmetric, and temporally dynamic influence on inflation. Notably, the EUCI consistently outperforms individual uncertainty measures in forecasting inflation. These results underscore the EUCI’s utility as a comprehensive indicator for inflation analysis and prediction in an environment of heightened global uncertainty, providing critical insights for policymakers.