Exchange rate response to economic policy uncertainty: evidence beyond asymmetry

Bisharat Hussain Chang; Omer Faruk Derindag; Nuri Hacievliyagil; Mehmet Canakci

doi:10.1057/s41599-022-01372-5

Exchange rate response to economic policy uncertainty: evidence beyond asymmetry

Humanit Soc Sci Commun. 2022;9(1):358. doi: 10.1057/s41599-022-01372-5. Epub 2022 Oct 10.

Authors

Bisharat Hussain Chang¹, Omer Faruk Derindag², Nuri Hacievliyagil², Mehmet Canakci³

Affiliations

¹ Department of Business Administration, Sukkur IBA University, Sukkur, Pakistan.
² Department of International Trade and Business, Inonu University, Battalgazi, Malatya, Turkey.
³ Department of Public Finance, Inonu University, Battalgazi, Malatya, Turkey.

Abstract

Recent studies have examined the relationship between economic policy uncertainty and exchange rate. We contribute to this literature by considering the effect of minor positive and major positive changes as well as minor negative and major negative changes in the economic policy uncertainties on the exchange rates. In this regard, we use a recently developed multiple asymmetric threshold nonlinear ARDL model along with Granger causality in quantile test. Our estimates support the asymmetric effect in three countries only when an asymmetric ARDL model is used. However, these estimates support asymmetric effects for all the sample countries when the multiple asymmetric threshold nonlinear ARDL model is used. Moreover, the effect varies across various quantiles when Granger causality in quantile test is used. Overall, the extended model helps us to examine more minutely the impact of EPU and GEPU on the exchange rate in G7 countries. The results of this study can be useful for the central banks to devise appropriate policies to intervene in the foreign exchange market.

Keywords: Economics.