Exchange rate response to economic policy uncertainty: evidence beyond asymmetry

Recent studies have examined the relationship between economic policy uncertainty and exchange rate. This study contributes by considering the effect of minor positive and major positive changes, as well as minor negative and major negative changes in economic policy uncertainties on exchange rates. Using a multiple asymmetric threshold nonlinear ARDL model and Granger causality in quantile tests, the study finds asymmetric effects for all sample countries (G7) when using the extended model. The effect varies across quantiles. The extended model offers a more detailed examination of the impact of EPU and GEPU on exchange rates in G7 countries, providing useful insights for central banks in devising appropriate foreign exchange market intervention policies.

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