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Causality between economic policy uncertainty and exchange rate in China with considering quantile differences

Yin Dai, Jing-wen Zhang, Xiu-zhen Yu and Xin Li
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Yin Dai: Ocean University of China, Qingdao, Shandong, China
Jing-wen Zhang: College of Finance and Statistics, Hunan University, Changsha, China
Xiu-zhen Yu: Qingyang Municipal Sub-branch PBC, Qingyang, Gansu, China
Xin Li: Antai College of Economics & Management, Shanghai Jiao Tong University, Shanghai, China

Theoretical and Applied Economics, 2017, vol. XXIV, issue 3(612), Autumn, 29-38

Abstract: Under an existing theoretical framework regarding the relationship between investment decision and the size of economic policy uncertainty (EPU), this paper tests the causality between EPU and exchange rate (ER). Theoretically, the impact of EPU on ER should be treated asymmetrically since investors need higher risk premiums to offset the consequences of growing EPU. The causality is investigated by using the quantile Granger causality test. This test shows that causality is more significant in the tail quantile interval. Since EPU of China is extremely high since 2016, and ER also experienced huge fluctuations during this period, our result provides an empirical basis for international investors to protect themselves against the risks associated with EPU in the exchange market.

Keywords: economic policy uncertainty; exchange rate; quantile causality. (search for similar items in EconPapers)
Date: 2017
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