The Dollar Exchange Rates in the Covid-19 Era: Evidence from 5 Currencies

Purpose: In this paper, through a novel Bayesian specification, we test whether the exchange rates are affected by the current crisis caused by the Covid-19 spread. Design/Methodology/Approach: we set out a novel Bayesian vector autoregressive model and compare it in terms of forecasting ability with the existing literature’s econometric models. Findings: Based on our findings, the novel Bayesian model proposed in the present paper, is better in terms of forecasting ability than the econometric models, and more importantly, it can unveil the impact of the Covid-19 spread on the exchange rates, while the econometric models failed to shed light on this relationship. Practical Implications: The Covid-19 has affected the overall economic system, in many ways, leading to its disorganization. Such an impact is highlighted by the present paper, examining the exchange rates. Originality/Value: The Bayesian framework proposed in the present paper has novel technical components and can unveil hidden effects of an exogenous variable on a system of endogenous variables, that the classical econometric approaches fail to unveil.