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Impact of uncertainty and exchange rate shocks: Theory and global empirics

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  • Suah, Jing Lian

Abstract

This paper offers two points on the impact of uncertainty and exchange rate shocks. (1) A conceptual model where behavioural frictions – rational inattentiveness and bounded expectations – interact with uncertainty, generating aggregate fluctuations. Central banks can target these behavioural frictions to stabilise output and prices. (2) Empirical findings from a panel of advanced and emerging economies. Output and inflation slow in response to uncertainty shocks. Government bond yields moderate and exchange rates depreciate, suggesting within-country and between-country flight-to-safety respectively. Exchange rate appreciation shocks generate similar responses. The Malaysia-specific analysis finds divergent responses in employment and output, likely reflecting compositional effects in more productive tradable and less productive non-tradable sectors.

Suggested Citation

  • Suah, Jing Lian, 2022. "Impact of uncertainty and exchange rate shocks: Theory and global empirics," Journal of Asian Economics, Elsevier, vol. 82(C).
    • Handle: RePEc:eee:asieco:v:82:y:2022:i:c:s1049007822000653
    DOI: 10.1016/j.asieco.2022.101510
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    More about this item

    Keywords

    Uncertainty; Rational inattention; Bounded rationality; VAR;
    All these keywords.

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • E7 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics

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