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The Impact Of Us Elections On The Dollar’S Exchange Rate

Author

Listed:
  • Constantinos Alexiou
  • Sofoklis Vogiazas
  • Colston Kane

Abstract

This paper explores the effect of U.S. domestic politics on the behaviour of international currency markets. Specifically, for the first time in the literature, we gauge the impact of a divided government on the exchange rate volatility of five currencies: the Japanese yen, the Canadian dollar, the British pound, the Mexican peso, and the euro. At the same time, we control for the impact of political and macroeconomic factors. A GARCH methodology has been adopted for this objective, using weekly data from 2000 to 2021. The evidence suggests that the partisan and divided government variables significantly impact the conditional variance equation, whilst the observed reduced levels of exchange rate volatility during a Democrat presidency run counter to prior studies on partisanship. In addition, exchange rate volatility seems to increase one month before an election and during periods of divided government. Given the nascent evidence, we argue that U.S. politics are instrumental in affecting global financial markets.

Suggested Citation

  • Constantinos Alexiou & Sofoklis Vogiazas & Colston Kane, 2023. "The Impact Of Us Elections On The Dollar’S Exchange Rate," Economic Annals, Faculty of Economics and Business, University of Belgrade, vol. 68(238), pages 7-39, July – Se.
    • Handle: RePEc:beo:journl:v:68:y:2023:i:238:p:7-39
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    References listed on IDEAS

    as
    1. Alberto Alesina, 1988. "Macroeconomics and Politics," NBER Chapters, in: NBER Macroeconomics Annual 1988, Volume 3, pages 13-62, National Bureau of Economic Research, Inc.
    2. Boris Hofmann & Taejin Park, 2020. "The broad dollar exchange rate as an EME risk factor," BIS Quarterly Review, Bank for International Settlements, December.
    3. Fotios Siokis & Panayotis Kapopoulos, 2003. "Electoral management, political risk and exchange rate dynamics: the Greek experience," Applied Financial Economics, Taylor & Francis Journals, vol. 13(4), pages 279-285.
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    More about this item

    Keywords

    International economics; exchange rates; political economy; GARCH modelling.;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • P16 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Capitalist Institutions; Welfare State
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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