Economic policy uncertainty and price pass-through effect of exchange rate in China

Abstract

Using the Chinese economic policy uncertainty (EPU) index, this paper investigates the spillover effect on the price pass-through effect of the RMB exchange rate and uncertainty, using the time-varying parameter vector autoregressive (TVP-VAR) model. We find that EPU has a significant effect on the price pass-through effect of the RMB exchange rate, which indicates that an increase in uncertainty will significantly enhance the price pass-through effect of the exchange rate. In addition, EPU itself can have a significant spillover effect on the exchange rate. Finally, the price pass-through effect of the RMB exchange rate is incomplete, and its impact on the price level gradually decreases along the circulation chain. The Chinese government should pay close attention to the impact of economic policy uncertainty on the price pass-through effect of the RMB exchange rate and the exchange rate and further strengthen the risk prevention and early warning mechanism to minimize the impact of uncertainty on China's macroeconomy.