Dynamic impacts of multidimensional uncertainty on the renminbi exchange rate: Insights from time-varying analysis

Using a time-varying model, this study investigates the dynamic impact of multidimensional uncertainty by considering data from the policy, finance, and energy markets on the renminbi (RMB) exchange rate from 2001 to 2022. It analyzes specific influence patterns during critical economic periods. We find that multiple dimensions of uncertainty influence the RMB exchange rate rapidly and that these influences exhibit notable temporal variation. (1) The dynamic impact of economic policy uncertainty (EPU) on the RMB exchange rate depends not only on the magnitude of EPU but also on the divergence between domestic and global EPU (also called relative uncertainty). When the domestic EPU is lower than its global counterpart, it can still promote RMB appreciation, even at high levels. (2) The dynamic effect of stock market uncertainty depends on the balance between asset substitutability and risk contagion. The dominance of asset substitutability triggers RMB appreciation during periods of stock market uncertainty. (3) The escalation of energy market uncertainty significantly increases the value of the RMB; this effect is especially pronounced after the financial crisis. Against the backdrop of heightened global economic uncertainty and the significant challenge of maintaining exchange rate stability, regulators should focus on the impact of relative uncertainty and prevent excessive spillovers from other markets. Fostering a risk-neutral mindset and effectively leveraging uncertainty is crucial for forming stable market expectations for exchange rates.