Extreme risk spillovers in RMB exchange rates: The role of categorical economic policy uncertainties

Extreme risk fluctuations of one exchange rate can spill over to other exchange rates, and exploring the impact of economic policy uncertainty (EPU) on the spillover effect remains a limited but crucial issue. In addition, do different types of EPUs impact exchange-rate risk spillovers consistently, and at which frequencies are they the most significant? To answer this puzzle, categorical EPUs, namely fiscal policy uncertainty (FPU), monetary policy uncertainty (MPU), trade policy uncertainty (TPU), and exchange rate and capital account policy uncertainty (ECPU), are introduced to explore the role that each type of EPU plays in the RMB exchange rate extreme risk spillovers. Moreover, our investigation is also conducted in multiple time-frequency domains through the implementation of the wavelet transform approach. The results indicate that the MPU exerts the most significant impact on total spillovers, while the TPU exhibits the weakest impact. For the net spillovers of each RMB exchange rate, the HKD/CNY and the AUD/CNY are more sensitive to EPUs, particularly in the long-term time horizon. These findings provide potential implications for policymakers in terms of market stabilization and for investors with foreign currency assets.