CAN ECONOMIC POLICY UNCERTAINTY PREDICT EXCHANGE RATE AND ITS VOLATILITY? EVIDENCE FROM ASEAN COUNTRIES
This paper examines whether global Economic Policy Uncertainty (EPU) predicts
exchange rates and their volatility in ten ASEAN countries using monthly data
from January 1997 to December 2017. Applying the predictive regression model of
Westerlund and Narayan (2012, 2015), we find that EPU positively and statistically
significantly predicts the exchange rates of six out of ten currencies. A one standard
deviation increase in the EPU index leads to a depreciation of between 0.050% and
2.047% in these currencies. Moreover, EPU predicts exchange rate volatility for all
ten ASEAN countries. Their exchange rate volatilities increase by between 0.107%
and 0.645% as a result of a one standard deviation increase in the EPU index. These
results are robust to different forecasting horizons and subsample periods, and after
controlling for the Global Financial Crisis.
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