Economic Policy Uncertaity and Exchange Market Pressure: Panel Evidence

Abstract

Abstract Controlling for macroeconomic indicators and trade openness, this study examined the impact of economic policy uncertainty on exchange market pressure for a panel of 25 countries from 2003Q2 to 2021Q3. The pooled mean group estimator, which allows for variation in short-run estimates and error variances but constrains long-run parameters to be the same, was employed to conduct the analysis. The overall panel was further split into developed, developing, and emerging economies panels to check if there was variation in the effect of economic policy uncertainty. The results indicate the presence of long-run relationships among the variables for all panels. Economic policy uncertainty has a significant positive effect on the exchange market pressure of the overall panel and panel of developed, developing, and emerging economies. However, there is variation in the effect of economic policy uncertainty. It has a larger effect on the exchange market pressure of developed and emerging economies than on their developed counterparts. Other variables relevant in explaining exchange market pressure are gross domestic product for the overall panel and consumer price index, domestic credit, gross domestic product, real exchange rate, and trade openness for developing and emerging economies.