This paper examines whether global Economic Policy Uncertainty (EPU) predictsexchange rates and their volatility in ten ASEAN countries using monthly datafrom January 1997 to December 2017. Applying the predictive regression model ofWesterlund and Narayan (2012, 2015), we find that EPU positively and statisticallysignificantly predicts the exchange rates of six out of ten currencies. A one standarddeviation increase in the EPU index leads to a depreciation of between 0.050% and2.047% in these currencies. Moreover, EPU predicts exchange rate volatility for allten ASEAN countries. Their exchange rate volatilities increase by between 0.107%and 0.645% as a result of a one standard deviation increase in the EPU index. Theseresults are robust to different forecasting horizons and subsample periods, and aftercontrolling for the Global Financial Crisis.
Juhro, Solikin M. and Phan, Dinh Hoang Bach
"CAN ECONOMIC POLICY UNCERTAINTY PREDICT EXCHANGE RATE AND ITS VOLATILITY? EVIDENCE FROM ASEAN COUNTRIES,"
Bulletin of Monetary Economics and Banking: Vol. 21:
2, Article 1.
Available at: https://bulletin.bmeb-bi.org/bmeb/vol21/iss2/1