Economic Policy Uncertainty and Exchange Rate Volatility

This paper investigates the impact of general economic and economic policy uncertainty on exchange rate volatility for ten industrial and emerging economies since 1990. The results in this paper suggest that home and US economic policy uncertainty directly increase exchange rate volatility for some of the currencies examined. For the more integrated industrial economies, there is strong evidence that both home-country and US economic policy uncertainty increase currency volatility during bad economic times. For the less integrated emerging economies, only home-country economic policy uncertainty increases exchange rate volatility during bad economic times. General economic uncertainty also increases exchange rate volatility, but its impact is generally smaller than that of economic policy uncertainty. Given that previous research has found a negative relationship between exchange rate volatility and economic activity, these results suggest that economic policy uncertainty can negatively affect economic performance.