Research on the time-varying spillover effect of international crude oil price on China’s exchange rate

Abstract

Based on the TVP-SV-VAR model, we study the dynamic spillover effect of crude oil price variation on China’s real effective exchange rate (REER) by introducing the economic policy uncertainty (EPU) and adopting monthly data from January 1995 to September 2021. Oil price fluctuations and EPU are correlated and affect China’s exchange rate movements. Empirical results show shocks to crude oil prices have dynamic negative spot impact on exchange rate movements, with the parameters of the spillover fluctuating between −0.2 and 0.05. The lagging impulse response results show a depreciation in the short-run, an appreciation in the medium-run but a variable long-run responses of China’s REER after an oil price shock. The spillover effects at specific time points show the same time varying characteristics. Chinese policy makers should take flexible measures to react the spillover diversity and minimize risks.