Government Policy Approval and Exchange Rates

56 Pages Posted: 27 Dec 2017

See all articles by Yang Liu

Yang Liu

The University of Hong Kong - Faculty of Business and Economics

Ivan Shaliastovich

University of Wisconsin - Madison

Date Written: November 1, 2017

Abstract

Measures of U.S. government policy approval, such as U.S. Presidential or Congressional ratings, are strongly related to persistent fluctuations in the dollar exchange rates. Contemporaneous correlations between approval ratings and the dollar value reach 50% against the advanced economy currencies, in real and nominal terms, in levels and multi-year changes. High approval ratings further forecast a decline in the dollar risk premium, a persistent increase in economic growth, and a reduction in future economic volatility several years in the future. We provide an illustrative economic model to interpret our empirical evidence. In the model, policy valuations are forward-looking and reflect net contributions of policy to economic growth. Policy valuations (approvals) increase at times of high policy-related growth and low policy-related uncertainty, which are the times of a strong dollar and low dollar risk premium.

Keywords: Government Policy Approval, Policy Uncertainty, Exchange Rate, Currency Risk

JEL Classification: F31, F37, G15, G18, P16

Suggested Citation

Liu, Yang and Shaliastovich, Ivan, Government Policy Approval and Exchange Rates (November 1, 2017). Available at SSRN: https://ssrn.com/abstract=3090851 or http://dx.doi.org/10.2139/ssrn.3090851

Yang Liu (Contact Author)

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Ivan Shaliastovich

University of Wisconsin - Madison ( email )

716 Langdon Street
Madison, WI 53706-1481
United States

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