The Dynamic Association of Economic Policy Uncertainty, Short-Term Cross-Border Capital Flows and Systemic Financial Risk

Abstract The global economic landscape has become increasingly volatile, as rising economic policy uncertainty (EPU) and frequent abnormal fluctuations in short-term cross-border capital flows (SCF) can easily trigger systemic financial risks (SFR). Clarifying the dynamic relationships among these three factors is therefore crucial for maintaining China’s financial stability and improving the effectiveness of policy implementation. Using monthly data on China’s financial institutions from 2000 to 2023, this study measures SFR using the DCC-GARCH-ΔCoVaR model and employs a time-varying parameter stochastic volatility vector autoregression (TVP-SV-VAR) model to analyze the dynamic linkages among EPU, SCF, and SFR. The results show that China’s SFR has generally declined, reflecting improved financial resilience; EPU consistently promotes SCF, while its impact on SFR varies significantly across different lag periods. Moreover, the medium- and long-term effects of SCF on SFR have intensified, with notable heterogeneity in shock intensity across different periods. Further analysis reveals that SCF helped mitigate SFR during the stock market crash period but significantly amplified it during the pandemic period. This study uncovers the time-varying characteristics of the EPU–SCF–SFR nexus and offers practical insights for emerging economies in seeking to balance capital flows and financial stability amid heightened policy uncertainty.