Uncertainty and Exchange Rate Volatility: The Case of Mexico

Abstract

This paper investigates the effect of uncertainty on the volatility of the Mexican peso U.S. dollar exchange rate for the period 1999 -2018. The empirical analysis consists on estimating a model by OLS and System GMM that includes measures of economic, political, and financial uncertainty, both domestic and international, as explicative variables. The main results show that greater uncertainty leads to higher exchange rate volatility; measures of international uncertainty are found to dominate domestic uncertainty measures, although the domestic uncertainty has also an important effect on the exchange rate volatility; and there is evidence of an amplifying effect of domestic economic uncertainty on exchange rate volatility, especially during periods of recession. These results are shown to be robust to different exchange rate volatility measures, different specifications, and different economic policy uncertainty indices.

Spillovers and Connectedness of Economic Policy Uncertainty and Exchange Rate Volatility: Evidence From Advanced Economies and Nigeria .

“…Exchange rate volatility, interest rate and inflation rate are net receivers of spillovers from the economic policy uncertainty. As Krol (2014) and Bush and Noria (2019) reports exchange rate volatility are determined by domestic and global economic policy uncertainty, there are spillovers from economic policy uncertainty and domestic economic variables to exchange rate volatility. The findings also support argument that uncertainty stemming from an economy could have significant effect on the exchange rate of another economy (Sin, 2015), as economic policy uncertainty of advanced economies is observed to have spillover effects on Nigeria's exchange rate volatility.…”

“…EPU forecast ability in predicting exchange rate was examined with no interest on spillovers and causality. Bush and Noria (2019) examined the effect of domestic and global uncertainty on Mexico exchange rate. The study finds that domestic uncertainty and global EPU are major determinants of exchange rate volatility.…”

Global Economic Uncertainties and Exchange Rate Management in Africa: A Panel Study

“…Although this is entirely bias-free, it establishes a high correlation with other quantitative uncertainty measures, such as stock volatility and exchange rate variability (Baker et al, 2016). Other measurements of uncertainty include domestic political uncertainty and domestic economic uncertainty (Noria and Bush, 2019).…”

“…This model allows for past conditional variances in the current conditional variances and has been adopted in studies to measure exchange rate, volatility, exchange rate variability, and also stock volatility. Some of the studies that have adopted GARCH are Kazutaka (2016) and Noria and Bush (2019). Some studies also employed the Ordinary Least Square (OLS) and the Two-Stage Least Squares (2SLS) regression analysis.…”

The Nonlinear Effect of Uncertainty in Portfolio Flows to Mexico

“…In this context, some recent works analyze the effects of uncertainty in Mexico. For example, Bush and Noria (2019) show that uncertainty generated abroad tends to rise foreign exchange rate volatility even more than uncertainty produced by domestic factors. In turn, Ibarra and Tellez-Leon (2019) analyze the response of FDI, portfolio flows, and other investment to global uncertainty (among other push and pull factors).…”