Economic policy uncertainty, investor sentiment, and exchange rate volatility: a study on the effects of non-linear linkages

This paper presents an empirical investigation of the nonlinear endogenous linkage between economic policy uncertainty (EPU), investor sentiment, and exchange rate volatility, utilizing the Time-Varying Parameter Structural Vector Autoregressive Model with Stochastic Volatility (TVP-SV-VAR). The study demonstrates that the effects of economic policy uncertainty and investor sentiment on exchange rate volatility are time-varying. Economic policy uncertainty not only directly influences the exchange rate but also exerts an indirect “superimposed” effect by influencing investor sentiment. These findings offer valuable insights for policymakers aiming to stabilize investor sentiment and maintain fluctuations in the renminbi (RMB) exchange rate within a reasonably balanced range.