Impact of Economic Policy Uncertainty on Exchange Market Pressure

Abstract

Capturing changes in foreign reserves and exchange rates through the exchange market pressure, this article investigates whether economic policy uncertainty plays any role in exchange market pressure movements while controlling for the effects of domestic and external factors. A panel of 20 countries was examined from 2003Q1 to 2017Q4 using panel techniques that are consistent in the presence of heterogeneity and cross-sectional dependence. The study finds that a long-run relationship exists between exchange market pressure and economic policy uncertainty. Our estimation results reveal that a rise in economic policy uncertainty, consumer price index, trade openness, and financial openness increases the severity of the exchange market pressure in the long run. However, gross domestic product (GDP) growth, domestic credit, and foreign direct investment inflows can cushion the effect of the pressure. Therefore, irrespective of whether a country operates fixed, flexible, or intermediate exchange rate regime, its foreign exchange market is still significantly affected by economic policy uncertainty.

Economic Policy Uncertainty and Stock Returns of Africa: A Wavelet Coherence Analysis

“…Furthermore, Iqbal et al [16] examined the relationship between economic policy uncertainty (EPU) and firm performance of US-listed nonfinancial firms. Several studies have attempted to employ various indicators of EPU to explore its effect on stock market volatility, which mostly focused on country-specific uncertainty on stock returns [7,8,14,[17][18][19]. Notwithstanding substantial advances in the related literature, there is limited research that analyses the way global economic policy uncertainty proxy by a major economy EPU affects stock market returns in the African continent.…”

The Impact of GDP and Its Expenditure Components on Unemployment Within BRICS Countries: Evidence of Okun’s Law From Aggregate and Disaggregated Approaches

“…It is assumed that disturbances in panel data models with large cross-section are independent of each other. However, there is considerable empirical evidence about violation of this assumption in panel regression models, which distorts the size of panel unit root tests (Olanipekun et al, 2019). It is, therefore, necessary to check the presence of cross-section among the panels before estimating the model.…”

Unveiling the causal impact of US economic policy uncertainty on exchange market pressure of African economies

“…This suggests that countries operating fixed exchange rate policy may have been generally overlooked. Olanipekun et al (2019b) addressed this shortcoming by investigating the impact of EPU on the EMP which captures the changes occurring in both foreign reserves and exchange rate in a panel of 20 countries. Their findings showed that it matters not, whether a country operated a fixed or flexible exchange rate regime, the foreign exchange market will still be negatively affected by EPU.…”

“…External policies and uncertainties driving the demand for and the world prices of their major export commodities will inevitably induce volatility in their macroeconomic fundamentals, such as exports, income, balance of payments, interest rates, domestic and FDIs, output and international trade. This exposure to volatility is capable of causing unexpected changes in either their external reserves, their exchange rates or both (see Balcilar, Gupta, Kyei, & Wohar, 2016;Bevan, Collier, & Gunning, 1992;Olanipekun et al, 2019b). Second, the sensitivity of the financial variables of African countries to external shocks makes them vulnerable to capital outflows during periods of high external uncertainty.…”