The Impact of Economic Policy Uncertainty on the RMB Exchange Rate

Abstract

Based on the monthly data from July 2005 to August 2021, this paper analyzes the impact of economic policy uncertainty (EPU) on the RMB exchange rate by using VAR model and VECM model in stata16. The results show that there is a two-way interactive causal relationship between the economic policy uncertainty and the fluctuation of the RMB exchange rate between China and the United States. The increased uncertainty of China's economic policy will have a depreciating impact on the RMB exchange rate, and the increased uncertainty of the US economic policy will have an impact on the appreciation of the RMB exchange rate. Through the comparison of the impulse response diagram of the RMB exchange rate from the uncertainty of the economic policy of China and the United States, the impact of China's economic policy uncertainty on the change of the RMB exchange rate is greater than that caused by the uncertainty of the US economic policy, and these conclusions are consistent with the theoretical analysis. The policy implication of this paper is that government departments should strengthen the measurement and monitoring of global EPU, maintain the stability of their own macroeconomy, enhance the transparency and continuity of their own policies, and avoid the adverse impact of large changes in exchange rates on economic development.