Unemployment fluctuations and currency returns in the United Kingdom: Evidence from over one and a half century of data

Deven Bathia, Riza Demirer, Rangan Gupta and Kevin Kotze
Additional contact information
Deven Bathia: School of Business and Management, Queen Mary University of London

No 2020-01, School of Economics Macroeconomic Discussion Paper Series from School of Economics, University of Cape Town

Abstract: This paper provides a long-term perspective to the causal linkages between currency dynamics and macroeconomic conditions by utilising a long span data set for the United Kingdom that extends back to 1856 and a time-varying causality testing methodology that accounts for the nonlinearity and structural breaks. Using unemployment fluctuations as a proxy for macroeconomic conditions and wavelet decompositions to obtain the fundamental factor that drives excess returns for the British pound, time varying causality tests based on alternative model specifications yield significant evidence of causal linkages and information spillovers across the labour and currency markets over the majority of the sample. Causal effects seem to strengthen during the Great Depression and later following the collapse of the Bretton Woods system, highlighting the role of economic crises in the predictive linkages between the two markets. While the predictive role of currency market dynamics over unemployment fluctuations reflects the effect of exchange rate volatility on corporate investment decisions, which in turn, drives subsequent labour market dynamics (e.g. Belke and Gross (2001); Belke and Kaas (2004); Feldman (2011); among others), we argue that causality in the direction of exchange rates from unemployment possibly reflects the signals regarding monetary policy actions, which in turn, spills over to financial markets. Overall, the findings indicate significant information spillovers across the labour and currency markets in both directions with significant policy making implications.

JEL-codes: C10 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-his and nep-mac
References: Add references at CitEc
Citations:

Downloads: (external link)
https://drive.google.com/file/d/18DKBWXghYEcGJxozl ... lYv/view?usp=sharing Full text (application/pdf)

Related works:
Journal Article: Unemployment fluctuations and currency returns in the United Kingdom: Evidence from over one and a half century of data (2021)
Working Paper: Unemployment Fluctuations and Currency Returns in the United Kingdom: Evidence from Over One and a Half Century of Data (2020)
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:ctn:dpaper:2020-01

Access Statistics for this paper

More papers in School of Economics Macroeconomic Discussion Paper Series from School of Economics, University of Cape Town Contact information at EDIRC.
Bibliographic data for series maintained by Kevin Kotze ().