UK Policy Uncertainty, Monetary Policy Stance and Exchange Rates in Light of Brexit

Abstract

This paper assesses the impact of economic policy uncertainty to UK monetary policy stance and exchange rate movements in light of the UK’s decision to leave the European Union. Our results show that the economic significance of exchange rate movements heightens during the Referendum period. We document statistical differences in the economic importance of policy uncertainty shocks to the interest rate differential in June 2016 relative to other dates thereby providing evidence in favour of time-variation in the influence that policy uncertainty has on UK monetary policy stance.

Keywords: Brexit, uncertainty, interest rate spread, shadow rates, exchange rates

JEL Classification: E6, F4