Asymmetric impact of Sino-US interest rate differentials and economic policy uncertainty ratio on RMB exchange rate

Abstract

• RMB exchange rate appreciation by widening Sino-US interest rate differentials is greater than depreciation by narrowing interest rate differentials. • RMB exchange rate responds more intensely to the increase than decrease in EPU ratio. • After the 2008 international financial crisis, the impact of Sino-US interest rate differentials and EPU ratio on the RMB exchange rate was weakened and reinforced, respectively. • COVID-19 has simultaneously intensified the responses of the RMB exchange rate to Sino-US interest rate differentials and EPU ratio. By using the NARDL model, we investigate the asymmetric relationship between Sino-US interest rate differentials, economic policy uncertainty (EPU) ratio, and the RMB exchange rate both in the long and short run. We further explore the changes in the asymmetric relations in light of the shocks of the 2008 international financial crisis and the COVID-19 pandemic. Our empirical results show that the long-run asymmetric effects of Sino-US interest rate differentials and EPU ratio on the RMB exchange rate are significant. Specifically, the RMB exchange rate appreciation resulting from the widening Sino-US interest rate differentials is greater than its depreciation resulting from the narrowing interest rate differentials in the long run. And the RMB exchange rate responds more intensely to the increase of Sino-US EPU ratio in the long run. In addition, in the aftermath of the 2008 international financial crisis, the impact of Sino-US interest rate differentials on the RMB exchange rate is found to be weaker, while the impact of the Sino-US EPU ratio on the RMB exchange rate is reinforced. COVID-19, for its part, has simultaneously intensified the responses of the RMB exchange rate to Sino-US interest rate differentials and EPU ratio.