U.S.‐China Tensions and Macroeconomic Fluctuations

ABSTRACT Business cycles and macroeconomic fluctuations are influenced by various factors. This paper analyzes the impact of the U.S.‐China Tension Index (UCT) on macroeconomic fluctuations in 32 countries using time series models from January 1999 to February 2024. The VAR model reveals that UCT shocks generate financial volatility and fluctuations in financial markets, which in turn transmit the shock to industrial production, leading to a decline in output. The GVAR model further supports this analysis by showing spillover effects from UCT shocks across economies. The results reveal capital flight, rising oil prices, and financial fluctuations. The estimates suggest that the impact of UCT is more pronounced on industrial production than on stock markets. Robustness checks using subsamples and alternative shock identification confirm these results. Tensions between the two major economies may trigger turbulence in financial markets, with effects propagating to production.