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Does Economic Policy Uncertainty Explain Exchange Rate Movements in the Economic Community of West African States (ECOWAS): A Panel ARDL Approach

Author

Listed:
  • Maud Korley

    (Faculty of Business and Law, Department of Accounting Finance and Economics, De Montfort University, Hugh Aston Building, Leicester LE1 9BH, UK)

  • Evangelos Giouvris

    (School of Business and Management, Royal Holloway, University of London, Egham TW20 0EX, UK)

Abstract

Research proposes that economic policy uncertainty (EPU) leads to exchange rate fluctuations. Given that African countries experience higher levels of uncertainty in developed/emerging markets, we examine the extent to which domestic and foreign EPU affect exchange rates for a panel of 12 ECOWAS countries covering the period 1996–2018. In order to account for non-stationarity, cross-sectional dependence, and heterogeneity, the paper employs the dynamic heterogeneous panel approach. The ECOWAS has a dual currency arrangement ranging from a common currency union (CFA) to floating exchange rates (Non-CFA). To account for this, this study splits the sample data into CFA and Non-CFA areas. In addition, this study considers the role of the global financial crisis in the exchange rate-EPU nexus. Our results show that domestic EPU has a positive effect on exchange rates in the long run for Non-CFA areas. Different from the existing literature, our results suggest that domestic EPU does not explain exchange rate fluctuations in the short run. For all countries, foreign EPU leads to appreciation in the long run and depreciation in the short run. Interestingly, foreign EPU has a more dominant effect on exchange rate fluctuations in the selected countries than domestic EPU. This may reflect the weak institutional framework in these countries, which allows external fluctuations to have a greater impact. Moreover, this could be attributed to the increase in foreign capital flows during the sample period. Thus, these countries must develop effective policies to effectively absorb these external shocks. Results are robust to different proxies of EPU.

Suggested Citation

  • Maud Korley & Evangelos Giouvris, 2023. "Does Economic Policy Uncertainty Explain Exchange Rate Movements in the Economic Community of West African States (ECOWAS): A Panel ARDL Approach," IJFS, MDPI, vol. 11(4), pages 1-22, November.
    • Handle: RePEc:gam:jijfss:v:11:y:2023:i:4:p:128-:d:1272261
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    References listed on IDEAS

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    More about this item

    Keywords

    economic policy uncertainty (EPU); exchange rate; ECOWAS; panel ARDL; VIX; GDP; JEL Classification: C23; F31;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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