Green Finance, 2019, 1(4): 346-363. doi: 10.3934/GF.2019.4.346.

Research article

Export file:


  • RIS(for EndNote,Reference Manager,ProCite)
  • BibTex
  • Text


  • Citation Only
  • Citation and Abstract

Sustainable exchange rates in China: Is there the heterogeneous effect of economic policy uncertainty?

1 College of Finance and Statistics, Hunan University, Changsha, 410006, P.R. China
2 Department of Accountancy, Finance and Economics, Huddersfield Business School, University of Huddersfield, Queensgate, HD1 3DH, U.K.

This study is to investigate the heterogeneous effect of economic policy uncertainty (EPU) on the exchange rate volatility of China using quantile regression for the period Jan 2003–Jan 2019. This paper significantly contributes to the empirical literature by taking into account the effect in individual and distributional heterogeneity and exploring the transmission mechanism of heterogeneity. The results demonstrate that, first, EPU from different countries have a heterogeneous impact on China’s exchange rate volatility both direction as well as distribution. Second, this paper further assesses the EPU transmission mechanism of bilateral trading and interest rate difference is mixed. These results provide policymakers with critical policy recommendations that contribute to the reduction of the exchange rate volatility and ensure stable economic development in China.
  Article Metrics

Keywords exchange rate volatility; economic policy uncertainty; heterogeneity; quantile regression

Citation: Liming Chen, Ziqing Du, Yong Tan. Sustainable exchange rates in China: Is there the heterogeneous effect of economic policy uncertainty?. Green Finance, 2019, 1(4): 346-363. doi: 10.3934/GF.2019.4.346


  • 1. Aastveit K, Natvik GJ, Sola S (2017) Economic uncertainty and the influence of monetary policy. J Int Money Financ 76: 50-67. doi:10.1016/j.jimonfin.2017.05.003    
  • 2. Akar C, Çiçek S (2015) "New" monetary policy instruments and the exchange rate volatility. Empir 43: 141-165. doi:10.1007/s10663-015-9298-y
  • 3. Ames M, Bagnarosa G, Peters GW (2017) Violations of uncovered interest rate parity and international exchange rate dependences. J Int Money Financ 73: 162-187. doi:10.1016/j.jimonfin.2017.01.002    
  • 4. Arghyrou MG, Pourpourides P (2016) Inflation announcements and asymmetric exchange rate responses. J Int Financ Markets Inst Money 40: 80-84. doi:10.1016/j.intfin.2015.07.002    
  • 5. Arouri M, Estay C, Rault C, et al. (2016) Economic policy uncertainty and stock markets: Long-run evidence from the US. Financ Res Lett 18: 136-141. doi:10.1016/    
  • 6. Bahmani-Oskooee M, Aftab M (2017) On the asymmetric effects of the exchange rate volatility on trade flows: New evidence from US-Malaysia trade at the industry level. Econ Model 63: 86-103. doi:10.1016/j.econmod.2017.02.004    
  • 7. Bahmani-Oskooee M, Aftab M (2018) Asymmetric effects of exchange rate changes on the Malaysia-China commodity trade. Econ Syst 42: 470-486. doi:10.1016/j.ecosys.2017.11.004    
  • 8. Bahmani-Oskooee M, Saha S (2019) On the effects of policy uncertainty on stock prices: an asymmetric analysis. Quant Financ Econ 3: 412-424. doi:10.3934/qfe.2019.2.412    
  • 9. Balcilar M, Gupta R, Kim WJ, et al. (2019) The role of economic policy uncertainties in predicting stock returns and their volatility for Hong Kong, Malaysia and South Korea. Int Rev Econ Financ 59: 150-163. doi:10.1016/j.iref.2018.08.016    
  • 10. Balcilar M, Gupta R, Kyei C, et al. (2016) Does Economic Policy Uncertainty Predict Exchange Rate Returns and Volatility? Evidence from a Nonparametric Causality-in-Quantiles Test. Open Econ Rev 27: 229-250. doi:10.1007/s11079-016-9388-x
  • 11. Bao L, Zhao G, Jin Z (2018) A new equilibrium trading model with asymmetric information. Quant Financ Econ 2: 217-229. doi:10.3934/qfe.2018.1.217    
  • 12. Bartsch Z (2019) Economic policy uncertainty and dollar-pound exchange rate return volatility. J Int Money Financ 98: 102067. doi:10.1016/j.jimonfin.2019.102067    
  • 13. Beckmann J, Czudaj R (2017) Exchange rate expectations and economic policy uncertainty. Eur J Polit Econ 47: 148-162. doi:10.1016/j.ejpoleco.2016.06.003    
  • 14. Bray M (1981) Futures trading, rational expectations, and the efficient markets hypothesis. Econometrica J Econometric Society, 575-596. doi: 10.2307/1911513
  • 15. Brogaard J, Detzel A (2015) The Asset-Pricing Implications of Government Economic Policy Uncertainty. Manage Sci 61: 3-18. doi:10.1287/mnsc.2014.2044    
  • 16. Caggiano G, Castelnuovo E, Figueres JM (2017) Economic policy uncertainty and unemployment in the United States: A nonlinear approach. Econ Lett 151: 31-34.    
  • 17. Caselli FG (2019) China's rise, asymmetric trade shocks and exchange rate regimes. Rev Int Econ 27: 1-35. doi:10.1111/roie.12353    
  • 18. Cebula RJ, Boylan R (2019) Uncertainty regarding the effectiveness of Federal Reserve monetary policies over time in the U.S.: an exploratory empirical assessment. Quant Financ Econ 3: 244-256. doi:10.3934/qfe.2019.2.244
  • 19. Chen L, Du Z, Hu Z (2019) Impact of economic policy uncertainty on the exchange rate volatility of China. Financ Res Lett. doi:10.1016/
  • 20. Cheung YW, Chinn MD, Qian X (2015) China-US trade flow behavior: the implications of alternative exchange rate measures and trade classifications. Rev World Econ152: 43-67. doi:10.1007/s10290-015-0232-y
  • 21. Christou C, Gupta R, Hassapis C (2017) Does economic policy uncertainty forecast real housing returns in a panel of OECD countries? A Bayesian approach. Q Rev Econ Financ 65: 50-60.    
  • 22. Dávalos J (2018) Trade openness effects on informality and the real exchange rate channel. Appl Econ Lett 26: 506-510. doi:10.1080/13504851.2018.1486982
  • 23. de Mendonca HF, Tiberto BP (2017) Effect of credibility and exchange rate pass-through on inflation: An assessment for developing countries. Int Rev Econ Financ 50: 196-244. doi:10.1016/j.iref.2017.03.027    
  • 24. Dimitriou D, Kenourgios D, Simos T (2017) Financial crises, exchange rate linkages and uncovered interest parity: Evidence from G7 markets. Econ Model 66: 112-120. doi:10.1016/j.econmod.2017.06.003    
  • 25. Engel C (2016) Exchange Rates, Interest Rates, and the Risk Premium. Am Econ Rev 106: 436-474. doi:10.1257/aer.20121365    
  • 26. Engle III RF, Ito T, Lin WL (1988) Meteor showers or heat waves? Heteroskedastic intra-daily volatility in the foreign exchange market. National Bureau of Economic Research Cambridge, Mass., USA.
  • 27. Fang L, Chen B, Yu H, et al. (2018) The importance of global economic policy uncertainty in predicting gold futures market volatility: A GARCH-MIDAS approach. J Futures Mark 38: 413-422. doi:10.1002/fut.21897    
  • 28. Gantman ER, Dabós MP (2017) International trade and factor productivity as determinants of the real effective exchange rate. Appl Econ Lett 25: 331-334. doi:10.1080/13504851.2017.1321829
  • 29. Huang Z, Liao G, Li Z (2019) Loaning scale and government subsidy for promoting green innovation. Technol Forecast Soc Chang 144: 148-156, doi:10.1016/j.techfore.2019.04.023.    
  • 30. Hurley DT, Papanikolaou N (2018) An Investigation of China-U.S. Bilateral Trade and Exchange Rate Changes Using the Autoregressive Distributed Lag Model. Econ Pap J Appl Econ Policy 37: 162-179. doi:10.1111/1759-3441.12206
  • 31. Jones PM, Olson E (2013) The time-varying correlation between uncertainty, output, and inflation: Evidence from a DCC-GARCH model. Econ Lett 118: 33-37. doi:    
  • 32. Kido Y (2016) On the link between the US economic policy uncertainty and exchange rates. Econ Lett 144: 49-52. doi:10.1016/j.econlet.2016.04.022    
  • 33. Ko JH, Lee CM (2015) International economic policy uncertainty and stock prices: Wavelet approach. Econ Lett 134: 118-122. doi:10.1016/j.econlet.2015.07.012    
  • 34. Koenker R, Bassett G (1978) Regression quantiles. Econometrica 46: 33-50. doi: 10.2307/1913643    
  • 35. Krol R (2014) Economic Policy Uncertainty and The exchange rate volatility. Int Financ 17: 241-256. doi:10.1111/infi.12049    
  • 36. Lartey EKK (2017) Fdi, Sectoral Output And Real Exchange Rate Dynamics Under Financial Openness. Bull Econ Res 69: 384-394. doi:10.1111/boer.12075    
  • 37. Lee KS, Werner RA (2018) Reconsidering Monetary Policy: An Empirical Examination of the Relationship Between Interest Rates and Nominal GDP Growth in the U.S., U.K., Germany and Japan. Ecol Econ 146: 26-34. doi:10.1016/j.ecolecon.2017.08.013
  • 38. Li XM, Peng L (2017) US economic policy uncertainty and co-movements between Chinese and US stock markets. Econ Model 61: 27-39. doi:10.1016/j.econmod.2016.11.019    
  • 39. Li XM, Zhang B, Gao R (2015) Economic policy uncertainty shocks and stock-bond correlations: Evidence from the US market. Econ Lett 132: 91-96. doi:10.1016/j.econlet.2015.04.013    
  • 40. Li Z, Dong H, Huang Z, et al. (2018) Asymmetric Effects on Risks of Virtual Financial Assets (VFAs) in different regimes: A Case of Bitcoin. Quant Financ Econ 2: 860-883. doi:10.3934/qfe.2018.4.860    
  • 41. Li Z, Dong H, Huang Z, et al. (2019) Impact of Foreign Direct Investment on Environmental Performance. Sustainability 11: 3538. doi:10.3390/su11133538    
  • 42. Li ZZ, Xiong DP, Daniela L, et al. (2019) HOW DOES ECONOMIC POLICY UNCERTAINTY EFFECT SIGNALING EXCHANGE RATE IN JAPAN? Econ Comput Econ Cybern Stud Res 53. doi:10.24818/18423264/
  • 43. Li ZH, Liao GK, Wang ZZ, et al. (2018) Green loan and subsidy for promoting clean production innovation. J Clean Prod 187: 421-431. doi:10.1016/j.jclepro.2018.03.066    
  • 44. Liao G, Li Z, Du Z, et al. (2019) The Heterogeneous Interconnections between Supply or Demand Side and Oil Risks. Energies 12: 2226. doi:10.3390/en12112226    
  • 45. Liu L, Zhang T (2015) Economic policy uncertainty and stock market volatility. Financ Res Lett 15: 99-105. doi:10.1016/    
  • 46. Liu LX, Shu H, Wei KCJ (2017) The impacts of political uncertainty on asset prices: Evidence from the Bo scandal in China. J Financ Econ 125: 286-310. doi:10.1016/j.jfineco.2017.05.011    
  • 47. Mueller P, Tahbaz-Salehi A, Vedolin A (2017) Exchange Rates and Monetary Policy Uncertainty. J Financ 72: 1213-1252. doi:10.1111/jofi.12499    
  • 48. Narayan S, Nguyen TT (2016) Does the trade gravity model depend on trading partners? Some evidence from Vietnam and her 54 trading partners. Int Rev Econ Financ 41: 220-237. doi:10.1016/j.iref.2015.08.010
  • 49. Özmen MU, Yılmaz E (2017) Co-movement of exchange rates with interest rate differential, risk premium and FED policy in "fragile economies". Emerg Mark Rev 33: 173-188. doi:10.1016/j.ememar.2017.10.007    
  • 50. Patton AJ (2010) Modelling Asymmetric Exchange Rate Dependence. Int Econ Rev 47: 527-556. doi:10.1111/j.1468-2354.2006.00387.x
  • 51. Phan DHB, Sharma SS, Tran VT (2018) Can economic policy uncertainty predict stock returns? Global evidence. J Int Financ Mark Inst Money 55: 134-150. doi:10.1016/j.intfin.2018.04.004    
  • 52. Qin F, Zhang J, Zhang Z (2018) RMB Exchange Rates and Volatility Spillover across Financial Markets in China and Japan. Risks 6: 120. doi:10.3390/risks6040120    
  • 53. Rodrik D (2008) The real exchange rate and economic growth. Brook Pap Econ Act 39: 365-412.
  • 54. Rofael D, Hosni R (2015) Modeling Exchange Rate Dynamics in Egypt: Observed and Unobserved Volatility. Modern Econ 06: 65-80. doi:10.4236/me.2015.61006    
  • 55. Santana-Gallego M, Perez-Rodriguez JV (2019) International trade, exchange rate regimes, and financial crises. North Am J Econ Financ 47: 85-95. doi:10.1016/j.najef.2018.11.009    
  • 56. Scheffel EM (2016) Accounting for the political uncertainty factor. J Appl Econom 31: 1048-1064.    
  • 57. Shahzad SJH, Raza N, Balcilar M, et al. (2017) Can economic policy uncertainty and investors sentiment predict commodities returns and volatility? Resour Policy 53: 208-218. doi:10.1016/j.resourpol.2017.06.010    
  • 58. Stauvermann PJ, Kumar RR, Shahzad SJH, et al. (2018) Effect of tourism on economic growth of Sri Lanka: accounting for capital per worker, exchange rate and structural breaks. Econ Change Restructuring 51: 49-68. doi:10.1007/s10644-016-9198-6    
  • 59. Sun X, Yao X, Wang J (2017) Dynamic interaction between economic policy uncertainty and financial stress: A multi-scale correlation framework. Financ Res Lett 21: 214-221. doi:10.1016/    
  • 60. Orlowski LT, Sywak M (2019) Wavering interactions between commodity futures prices and us dollar exchange rates. Quant Financ Econs 3: 221-243. doi:10.3934/qfe.2019.2.221    
  • 61. Tamakoshi G, Hamori S (2014) Co-movements among major European exchange rates: A multivariate time-varying asymmetric approach. Int Rev Econ Financ 31: 105-113. doi:10.1016/j.iref.2014.01.016    
  • 62. Tervala J (2019) US monetary policy and China's exchange rate policy during the great recession. Int J Financ Econ 24: 113-130. doi:10.1002/ijfe.1652    
  • 63. Tsai IC (2017) The source of global stock market risk: A viewpoint of economic policy uncertainty. Econ Model 60: 122-131. doi:10.1016/j.econmod.2016.09.002    
  • 64. Wang Y, Zhang B, Diao X, et al. (2015) Commodity price changes and the predictability of economic policy uncertainty. Econ Lett 127: 39-42.    
  • 65. Yang G, Gu Q (2016) Effects of exchange rate variations on bilateral trade with a vehicle currency: Evidence from China and Singapore. J Int Money Financ 68: 50-73. doi:10.1016/j.jimonfin.2016.06.010    
  • 66. Yu YD (2018) The Long-Drawn Process of reform of the Exchange Rate Regime and the Evolution of China's Exchange Rate Policy. China Econ J 11: 284-300. doi:10.1080/17538963.2018.1512542    
  • 67. Li ZZ, De-Ping X, Lavinia Daniela M, et al. (2019) How Does Economic Policy Uncertainty Effect Signaling Exchange Rate in Japan? Econ Comput Econ Cybern Stud Res 53: 141-156. doi:10.24818/18423264/


Reader Comments

your name: *   your email: *  

© 2019 the Author(s), licensee AIMS Press. This is an open access article distributed under the terms of the Creative Commons Attribution Licese (

Download full text in PDF

Export Citation

Copyright © AIMS Press All Rights Reserved