On the Exchange Rate and Economic Policy Uncertainty Nexus: A Panel VAR Approach for Emerging Markets

20 Pages Posted: 15 Jun 2020 Last revised: 18 Nov 2021

See all articles by Abir Abid

Abir Abid

University of Orleans

Christophe Rault

University of Orleans; IZA Institute of Labor Economics; CESifo (Center for Economic Studies and Ifo Institute)

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Abstract

We examine the Exchange Rate Volatility (ERV) response to the Economic Policy Uncertainty (EPU) shocks from a panel VAR perspective used for the first time in this context. Focusing on Emerging Market Economies (EME), our noteworthy findings postulate that (a) both home and foreign EPU shocks are highly significant in explaining the ERV, (b) the contribution of the foreign EPU to the ERV fluctuation overcomes the local EPU's share, (c) the ERV acts as a significant transmission channel of the US-EPU to the economic activity, (d) the home EPU increases with higher US-EPU and vice versa and (e) the latter is surprisingly and markedly sensitive to EME macroeconomic conditions. Our findings are robust to different sensitivity analyses, provide novel insights into EPU international spillovers, and have interesting policy implications for EME decisions makers and investors.

Keywords: emerging markets, economic policy uncertainty, exchange rates volatility, Panel VAR

JEL Classification: G15, E44, C22

Suggested Citation

Abid, Abir and Rault, Christophe and Rault, Christophe, On the Exchange Rate and Economic Policy Uncertainty Nexus: A Panel VAR Approach for Emerging Markets. Available at SSRN: https://ssrn.com/abstract=3627067 or http://dx.doi.org/10.2139/ssrn.3627067

Abir Abid (Contact Author)

University of Orleans ( email )

Rue de Blois
B.P. 6739
45067 Orleans Cedex 2, Orleans cedex 2 45067
France

Christophe Rault

University of Orleans ( email )

Rue de Blois
BP 6739
LEO, Orleans, Orleans cedex 2 45067
France

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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