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Uncertainty and Exchange Rates: Global Dynamics (Well, I Don't Quite Know Anymore)

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  • Suah, Jing Lian

Abstract

This paper offers two points on the impact of uncertainty and exchange rate shocks on output. (1) A conceptual model where behavioural frictions --- rational inattentiveness and bounded expectations --- interact with uncertainty, generating aggregate fluctuations. Central banks can target these behaviourial 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. In a panel fixed effects and quantile regression setting, I find indicative interaction between output, exchange rate and uncertainty, and a distributional dimension.

Suggested Citation

  • Suah, Jing Lian, 2020. "Uncertainty and Exchange Rates: Global Dynamics (Well, I Don't Quite Know Anymore)," MPRA Paper 109087, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:109087
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    More about this item

    Keywords

    Uncertainty; Rational Inattention; Bounded Rationality; VAR;
    All these keywords.

    JEL classification:

    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • E03 - Macroeconomics and Monetary Economics - - General - - - Behavioral Macroeconomics

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