Economic Policy Un Economic Shocks And Exchange Rate Fluctuation

The existing literature shows that the economic policy uncertainty has a substantial negative impact on asset prices and their fluctuations.In recent years,with the increasing economic policy uncertainty,the fluctuation of the RMB exchange rate has also shown a significant upward trend.Under this background,this paper aims to study the asymmetric effect of economic policy uncertainty on the RMB exchange rate fluctuation.Specifically,this paper used the LSTVAR model to divide the sample into two zones,with high and low economic policy uncertainty level individually,and study the impact of macro shocks such as economic growth rate,interest rate,M2 growth rate and inflation rate on exchange rate fluctuation under different EPU levels.The results of empirical analysis show that when the China's economic policy uncertainty is high,the macro shock will cause a greater fluctuation in the RMB exchange rate.The transmission paths are as follow:under the high level of economic policy uncertainty,once the shocks occur,consumers adjust and revise the expectations of the macroeconomic factors substantially,which resulting in more drastic exchange rate changes;Correspondingly,under the low level of economic policy uncertainty,when shocks occur,the consumers' expectations changes are relatively small,so the exchange rate changes are relatively mild.In addition,this paper also uses the TPU index constructed by Davis et al.(2018),the MPU index and the FPU index constructed by Zhu Jun and Cai Tiantian(2018)to compare the differences impact of policies,and obtains the conclusion that the trade policy uncertainty(TPU)has a more significant impact on exchange rate movements.In conclusion,this paper helps to further understand the determinant of the RMB exchange rate,and also provides a new perspective for government to reduce policy uncertainty and maintain the smooth operation of the economy.