Abstract
In this article, we estimate the links between nominal exchange rates (JPY/USD and CNY/USD) and economic policy uncertainty (EPU) in China and Japan by employing monthly data during the period span from January 1997 to September 2020. The threshold cointegration approach focus in TAR, M-TAR, C-TAR and C-MTAR is used. Results indicate the evidence of asymmetric effect in the adjustment process to equilibrium and the M-TAR is the best model to detect threshold effect for the (CNY/USD-CNYEPU) pair and the C-TAR is the best model to detect threshold effect for the (JPY/USD-JPYEPU) pair.
Highlights
Uncertainty in global economic policy results in sharp market fluctuations
Considering the pair (CNY/USD-CNYEPU), the results indicate that the threshold value is zero for the TAR and MTAR models
Results of the Asymmetric Error-correction Model In order to investigate the movement of the foreign exchange markets such as CNY/USD and JPY/USD and economic policy uncertainty (EPU) series in a long-run equilibrium relationship, we analyze the asymmetric error correction model
Summary
Uncertainty in global economic policy results in sharp market fluctuations. Global events and geopolitical issues are fundamentally the cause of market fluctuations. Baker et al (2016) find that uncertainty in economic policy affects exchange rate volatility, but it has adverse effects on economic activity. Evidence from Threshold Cointegration with Asymmetric Adjustment relationship between policy uncertainty and the exchange rate weighs negatively on financial markets. The results show that uncertainty in economic policy has an effect on short-term exchange rates. Sin (2015) studied the relationship between EPU on exchange rate volatility for China using a structural vector autoregressive model (SVAR). The main contribution of this paper is to study the nonlinear cointegration (threshold effect) and asymmetric adjustment between EPU and foreign exchange market considering the China and Japan economies.
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