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Economic policy uncertainty shocks, economic activity, and exchange rate adjustments

Author

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  • Nilavongse, Rachatar
  • Rubaszek, Michał,
  • Uddin, Gazi Salah

Abstract

We investigate the impact of foreign and domestic economic policy uncertainty (EPU) shocks on the UK economy. Simulations with a structural VAR model indicate that domestic industrial production declines after a shock to the EPU index in the US. On the contrary, disturbances to domestic uncertainty are an important source of real exchange rate fluctuations. Historical decomposition shows that a surge in domestic EPU after Brexit referendum was the reason behind a massive depreciation of the British pound. These results are robust to different model specifications.

Suggested Citation

  • Nilavongse, Rachatar & Rubaszek, Michał, & Uddin, Gazi Salah, 2020. "Economic policy uncertainty shocks, economic activity, and exchange rate adjustments," Economics Letters, Elsevier, vol. 186(C).
  • Handle: RePEc:eee:ecolet:v:186:y:2020:i:c:s0165176519303842
    DOI: 10.1016/j.econlet.2019.108765
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    References listed on IDEAS

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    Cited by:

    1. Abir Abid & Christophe Rault, 2020. "On the Exchange Rate and Economic Policy Uncertainty Nexus: A Panel VAR Approach for Emerging Markets," CESifo Working Paper Series 8189, CESifo.
    2. Abir ABID & Christophe RAULT, 2020. "On the Exchange Rates Volatility and Economic Policy Uncertainty Nexus: A Panel VAR Approach for Emerging Markets," LEO Working Papers / DR LEO 2816, Orleans Economics Laboratory / Laboratoire d'Economie d'Orleans (LEO), University of Orleans.

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    More about this item

    Keywords

    Brexit; Globalization; Policy uncertainty; Real exchange rate; Structural vector autoregressions;
    All these keywords.

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • F2 - International Economics - - International Factor Movements and International Business

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