Economic policy uncertainty and medical inflation in China: multi-scale linkages and time-varying responses

Medical inflation is a central health-system cost pressure, yet little is known about whether economic policy uncertainty (EPU) affects medical prices differently across timescales and historical periods.

This paper examines the multi-scale and time-varying relationship between EPU and medical inflation in China using quarterly data from 2004Q1 to 2026Q1, wavelet filtering, and an SV-TVP-FAVAR model. Posterior uncertainty is summarized by the posterior mean and the 16th and 84th percentiles.

Positive responses are present in both frequency-specific baseline models. The full-sample posterior-mean maxima for the higher- and lower-frequency EPU components are 0.297 and 0.108; they are 0.214 and 0.208 when the sample ends in 2025Q4. In the three-factor model, aggregate health-care CPI reaches 0.237 for a shock dated 2020Q2 at an eight-quarter horizon (central 68% credible interval [0.063, 0.412]). The eight-quarter posterior band overlaps those at several earlier dates, and the estimated magnitude varies with factor count. In the baseline full-sample specification, western medicine prices have the largest consumer-side posterior-mean maximum, reaching 0.424 for a shock dated 2020Q3 at six quarters (central 68% credible interval [0.231, 0.618]), although the exact peak date varies across specifications. Traditional Chinese medicine prices and medical service CPI show smaller positive responses, while pharmaceutical manufacturing PPI provides complementary evidence from the production side.

Overall, the results show that the EPU-medical inflation relationship varies across EPU frequency scales, historical dates, and health-price components.