Time-varying Effects of U.S. Economic Policy Uncertainty on Exchange Rate Return and Volatility in China

Abstract

ABSTRACT We examine the mean and volatility spillover effects of U.S. economic policy uncertainty (EPU) on the RMB exchange rate return and the effects’ time-varying features corresponding to the 2015 “8.11” RMB exchange rate reform and the Sino–U.S. trade friction. We find that rising U.S. EPU amplifies the RMB exchange rate return’s volatility at the volatility spillover level while driving the RMB’s appreciation against the USD at the mean spillover level. After the reform’s implementation, the U.S. EPU’s mean spillover on the RMB exchange rate return disappears, while the volatility spillover increases and is further enhanced by trade friction.