The Impact of Economic Policy Uncertainty on Exchange Rate Fluctuations with using the Nonlinear Autoregressive distributed lags Model (NARDL)

Abstract

The purpose of this paper is to investigate the effect of economic policy uncertainty on exchange rate fluctuations in Iran. For this purpose, the data of the period 1368-1398 based on the frequency of quarterly data and the nonlinear autoregressive distributed lags have been used. The use of nonlinear models will lead to more realistic results than the response of the exchange rate variable to policy shocks. In this study, first, the exchange rate fluctuations index was modeled using the GARCH method, and in the second step, the effects of economic policy uncertainty in the form of positive and negative shocks on exchange rate fluctuations were estimated using the NARDL method. The results of the estimated model show that uncertainty in economic policies in the form of monetary and fiscal policy shocks has led to increased instability in the exchange rate in the country. The analysis of shocks showed that the impact of negative shocks on the exchange rate was more severe than positive monetary and financial shocks.

Keywords

• exchange rate
• uncertainty
• economic policies
• nonlinear autoregressive distributed lags (nardl)