Economic policy uncertainty shocks, economic activity, and exchange rate adjustments
2020
Nilavongse, Rachatar | Rubaszek, Michał | Uddin, Gazi Salah
We investigate the impact of foreign and domestic economic policy uncertainty (EPU) shocks on the UK economy. Simulations with a structural VAR model indicate that domestic industrial production declines after a shock to the EPU index in the US. On the contrary, disturbances to domestic uncertainty are an important source of real exchange rate fluctuations. Historical decomposition shows that a surge in domestic EPU after Brexit referendum was the reason behind a massive depreciation of the British pound. These results are robust to different model specifications.
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