Economic policy uncertainty and exchange rates before and during the COVID-19 pandemic

Authors : Nagmi AİMER

Pages : 119-127

View : 18 | Download : 13

Publication Date : 2021-12-31

Article Type : Research Paper

Abstract :Recently, the extent to which economic policy uncertainty insert ignore into journalissuearticles values(EPU); affects exchange rate movements has been an important research question. Therefore, this paper examines the effects of both economic policy uncertainty insert ignore into journalissuearticles values(EPU); and the volatility index insert ignore into journalissuearticles values(VIX); on exchange rates for the case of four countries, which recorded the highest number of deaths due to the COVID-19 pandemic. Furthermore, we use the bounds testing approach to cointegration and error correction model, developed within an ARDL model. The findings show that: insert ignore into journalissuearticles values(i); during the pre-pandemic period, the co-integration tests showed that there is a positive effect of the VIX index on the Brazilian real in the long run. Likewise, there is a positive effect of the volatility index on the exchange rates of both the Indian rupee and the Swedish krona during the pandemic period, as well as between the volatility index and the Indian rupee before and during the COVID-19. Regarding the effect of EPU on the exchange rates, we found that during the pre-pandemic period there was no statistically significant effect for the four countries, while during the pandemic period, there is a positive relationship between the EPU and the Brazilian reals. While the case of the before and during the COVID-19, we find that there is a positive relationship between the EPU index and the exchange rates of both the Indian rupees and Mexican new pesos. insert ignore into journalissuearticles values(ii); we note that the error correction coefficients for the period before the outbreak of the epidemic are lower than during the pandemic period. Specifically, the exchange rate correction in the epidemic period is faster than in the period preceding the outbreak of the epidemic. This indicates that before a pandemic period is more vulnerable to fundamental shocks. insert ignore into journalissuearticles values(iii); the impact of the VIX shock is greater than the EPU shock. Our results offer practical implications for policymakers and investors.
Keywords : COVID 19, Exchange rate, EPU, VIX, Bound test