The Predictive Power of Economic Policy Uncertainty for Exchange Rate Volatility: Evidence From Multiple Economies

Qing Wei, Bisharat Hussain Chang and Yingyuan Cai

Australian Economic Papers, 2025, vol. 64, issue 2, 235-250

Abstract: This paper evaluates the in‐sample and out‐of‐sample forecasting performance of EPU vis‐à‐vis other widely used macroeconomic variables for volatility in exchange rate variability. Our findings, based on both in‐sample and out‐of‐sample forecasting across a range of economies, indicate that the differential of the EPU between any two nations is persistently one step ahead of alternative macroeconomic predictors. Monte Carlo simulations and mechanism analysis indicate that a greater differential of the EPU is negatively correlated with bilateral trade, on the one hand, and positively with bilateral foreign exchange trading activities, on the other hand. The findings further indicate that EPU is a formidable predictor of both short‐run and long‐run exchange rate volatility once the endogeneity problem has been addressed, along with using multiple proxies. These results have important implications for studies about the causes of exchange rate fluctuations and enlighten policymakers and market participants on managing foreign exchange risks.

Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
https://doi.org/10.1111/1467-8454.12389

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bla:ausecp:v:64:y:2025:i:2:p:235-250

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=0004-900X

Access Statistics for this article

Australian Economic Papers is currently edited by Daniel Leonard

More articles in Australian Economic Papers from Wiley Blackwell
Bibliographic data for series maintained by Wiley Content Delivery ().