Impact of economic policy uncertainty on exchange rate volatility of China

TLDR

The study examines how economic policy uncertainty affects China’s exchange‑rate volatility from 2001 to 2018. Quantile regression reveals that EPU drives China’s exchange‑rate volatility asymmetrically and heterogeneously, with significant positive effects across all quantiles and varying impacts from US, Europe, and Japan EPU, while Hong Kong EPU shows no significant correlation.

Abstract

This study investigates the impact of economic policy uncertainty (EPU) on China's exchange rate volatility from December 2001 to November 2018. Using the quantile regression, our results show that the impact of EPU on exchange rate volatility in China exhibits asymmetry as well as heterogeneity in different markets. The EPU for China impacts positively and significantly on all quantiles volatilities of exchange rates. Furthermore, we observe that EPU has a mixed effect on exchange rate volatility with apparent economy-by-economy differences. The US, Europe and Japan EPU have significant impacts, while Hong Kong EPU is insignificantly correlated with exchange rate volatility.