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Policy Uncertainty and Foreign Exchange Rates: The DCC-GARCH Model of the US / Japanese Foreign Exchange Rate

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  • Kazutaka Kurasawa

    (Yamanashi Gakuin University)

Abstract

Since the breakdown of the Bretton Woods system in the 1970s, the US / Japan foreign exchange rate has been largely influenced by policy changes in the United States and Japan. This study applies the multivariate dynamic conditional correlation (DCC) ? generalized autoregressive conditional heteroscedasticity (GARCH) models to analyze the time-varying effects of policy uncertainty, measured by the economic policy uncertainty (EPU) index of Baker et al. (2013, 2016), on the US / Japan foreign exchange rate. Using the EPU index as a proxy variable, it shows that the dynamic conditional correlations between policy uncertainty and the exchange rate are not time-invariant, but even sign-changing in the sample period. The analysis also empirically examined what drives the evolution of the time-varying correlations. The driving force of the correlations is, however, mostly attributed to unknown random factors.

Suggested Citation

  • Kazutaka Kurasawa, 2016. "Policy Uncertainty and Foreign Exchange Rates: The DCC-GARCH Model of the US / Japanese Foreign Exchange Rate," International Journal of Economic Sciences, International Institute of Social and Economic Sciences, vol. 5(4), pages 1-19, December.
    • Handle: RePEc:sek:jijoes:v:5:y:2016:i:4:p:1-19
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    References listed on IDEAS

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    2. López Noria Gabriela & Bush Georgia, 2019. "Uncertainty and Exchange Rate Volatility: the Case of Mexico," Working Papers 2019-12, Banco de México.
    3. Mohini GUPTA & Purwa SRIVASTAVA & Amritkant MISHRA & Malayaranjan SAHOO, 2021. "Time-varying volatility spillover of foreign exchange rate in three Asian markets: Based on DCC-GARCH approach," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania / Editura Economica, vol. 0(4(629), W), pages 105-120, Winter.
    4. Terver T. Kumeka & Olabusuyi R. Falayi & Adeniyi J. Adedokun & Francis O. Adeyemi, 2022. "An econometric analysis of economic policy uncertainty and exchange market pressure of the three largest economies in West Africa," SN Business & Economics, Springer, vol. 2(11), pages 1-33, November.
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    More about this item

    Keywords

    policy uncertainty; foreign exchange rate; DCC model; GARCH model; time-varying correlation;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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