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Uncertainty and Exchange Rate Volatility: the Case of Mexico

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  • López Noria Gabriela
  • Bush Georgia

Abstract

This paper investigates the effect of uncertainty on the volatility of the Mexican peso U.S. dollar exchange rate for the period 1999 - 2018. The empirical analysis consists on estimating a model by OLS and System GMM that includes measures of economic, political, and financial uncertainty, both domestic and international, as explicative variables. The main results show that greater uncertainty leads to higher exchange rate volatility; measures of international uncertainty are found to dominate domestic uncertainty measures, although the domestic uncertainty has also an important effect on the exchange rate volatility; and there is evidence of an amplifying effect of domestic economic uncertainty on exchange rate volatility, especially during periods of recession. These results are shown to be robust to different exchange rate volatility measures, different specifications, and different economic policy uncertainty indices.

Suggested Citation

  • López Noria Gabriela & Bush Georgia, 2019. "Uncertainty and Exchange Rate Volatility: the Case of Mexico," Working Papers 2019-12, Banco de México.
  • Handle: RePEc:bdm:wpaper:2019-12
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    References listed on IDEAS

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    Cited by:

    1. Salgado Alfredo & Trujillo Alejandro, 2023. "Growth at Risk and Uncertainty: Evidence from Mexico," Working Papers 2023-08, Banco de México.
    2. Hernández Vega Marco A., 2021. "The Nonlinear Effect of Uncertainty in Portfolio Flows to Mexico," Working Papers 2021-11, Banco de México.
    3. Terver T. Kumeka & Olabusuyi R. Falayi & Adeniyi J. Adedokun & Francis O. Adeyemi, 2022. "An econometric analysis of economic policy uncertainty and exchange market pressure of the three largest economies in West Africa," SN Business & Economics, Springer, vol. 2(11), pages 1-33, November.
    4. Mario Canales & Bernabe Lopez-Martin, 2021. "Uncertainty, Risk, and Price-Setting: Evidence from CPI Microdata," Working Papers Central Bank of Chile 908, Central Bank of Chile.

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    More about this item

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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