East Asian Economic Review

Korea Institute for International Economic Policy (대외경제정책연구원)
권호 표지
DOI QR코드

DOI QR Code

Economic Policy Uncertainty in the US: Does It Matter for Korea?

  • Lee, Seojin (Shanghai Lixin University of Accounting and Finance)
  • Received : 2017.12.20
  • Accepted : 2018.02.06
  • Published : 2018.03.30
Download PDF
⟨ Previous Next ⟩

Abstract

Using the indicators of economic policy uncertainty developed by Baker et al. (2016), this paper investigates the effects of the US economic policy uncertainty on the Korea economic uncertainty as well as Korea-US foreign exchange risk. The key findings are that: (i) the degree of spillovers of policy uncertainty from the US to Korea is considerable but not comparatively high; (ii) the US policy uncertainty plays a stronger and more consistent role in Korean currency risk than Korea policy uncertainty and other macro variables. It implies that the economic policy uncertainty in the US is an important contributor to Korea-US exchange rates.

Keywords

References

  1. Acharya, V., Engle, R. and M. Richardson. 2012. "Capital Shortfall: A New Approach to Ranking and Regulating Systemic Risks," American Economic Review, vol. 102, no. 3, pp. 59-64. https://doi.org/10.1257/aer.102.3.59
  2. Acharya, V., Pedersen, L., Philippon, T. and M. Richardson. 2010. "Measuring Systemic Risk," Manuscript, Stern School, New York University.
  3. Adrian, T. and M. Brunnermeier. 2011. CoVaR. NBER Working Paper, no. 17454.
  4. Andersen, T., Bollerslev, T., Diebold, F. and P. Labys. 2003. "Modeling and Forecasting Realized Volatility," Econometrica, vol. 71, no. 2, pp. 579-625. https://doi.org/10.1111/1468-0262.00418
  5. Backus, D. K., Foresi, S. and C. I. Telmer. 2001. "Affine Term Structure Models and the Forward Premium Anomaly," Journal of Finance, vol. 56, no. 1, pp. 279-304. https://doi.org/10.1111/0022-1082.00325
  6. Baker, S. R., Bloom, N. and S. J. Davis. 2016. "Measuring Economic Policy Uncertainty," Quarterly Journal of Economics, vol. 131, no. 4, pp. 1593-1636. https://doi.org/10.1093/qje/qjw024
  7. Beber, A., Breedon, F. and A. Buraschi. 2010. "Differences in Beliefs and Currency Risk Premiums," Journal of Financial Economics, vol. 98, no. 3, pp. 415-438. https://doi.org/10.1016/j.jfineco.2010.07.001
  8. Bijsterbosch, M. and P. Guerin. 2013. "Characterizing Very High Uncertainty Episodes," Economics Letters, vol. 121, no. 2, pp. 239-243. https://doi.org/10.1016/j.econlet.2013.08.005
  9. Bloom, N. 2009. "The Impact of Uncertainty Shocks," Econometrica, vol. 77, no. 3, pp. 623-685. https://doi.org/10.3982/ECTA6248
  10. Born, B. and J. Pfeifer. 2014. "Policy Risk and the Business Cycle," Journal of Monetary Economics, vol. 68, pp. 68-85. https://doi.org/10.1016/j.jmoneco.2014.07.012
  11. Brogaard, J. and A. Detzel. 2015. "The Asset-Pricing Implications of Government Economic Policy Uncertainty," Management Science, vol. 61, no. 1, pp. 3-18. https://doi.org/10.1287/mnsc.2014.2044
  12. Brunnermeier, M., Nagel, S. and L. Pedersen. 2008. Carry Trades and Currency Crashes. NBER Working Paper, no. 14473.
  13. Brunnermeier, M. and L. Pedersen. 2009. "Market Liquidity and Funding Liquidity," Review of Financial Studies, vol. 22, no. 6, pp. 2201-2238. https://doi.org/10.1093/rfs/hhn098
  14. Colombo, V. 2013. "Economic Policy Uncertainty in the US: Does it Matter for the Euro Area?," Economics Letters, vol. 121, no. 1, pp. 39-42. https://doi.org/10.1016/j.econlet.2013.06.024
  15. Della Corte, P., Ramadorai, T. and L. Sarno. 2016. "Volatility Risk Premia and Exchange Rate Predictability," Journal of Financial Economics, vol. 120, no. 1, pp. 21-40. https://doi.org/10.1016/j.jfineco.2016.02.015
  16. Diebold, F. X. and K. Yilmaz. 2009. "Measuring Financial Asset Return and Volatility Spillovers, with Application to Global Equity Markets," Economic Journal, vol. 119, no. 534, pp. 158-171. https://doi.org/10.1111/j.1468-0297.2008.02208.x
  17. Diebold, F. X. 2012. "Better to Give han to Receive: Predictive Directional Measurement of Volatility Spillovers," International Journal of Forecasting, vol. 28, no. 1, pp. 57-66. https://doi.org/10.1016/j.ijforecast.2011.02.006
  18. Diebold, F. X. 2014. "On the Network Topology of Variance Decompositions: Measuring the Connectedness of Financial Firms," Journal of Econometrics, vol. 182, no. 1, pp. 119-134. https://doi.org/10.1016/j.jeconom.2014.04.012
  19. Farhi, E., Fraiberger, S., Gabaix, X., Ranciere, R. and A. Verdelhan. 2009. Crash Risk in Currency Markets. NBER Working Paper, no. 15062.
  20. Friedman, M. 1968. "The Role of Monetary Policy," American Economic Review, vol. 58, no. 1, pp. 1-17.
  21. Grad, D. 2010. "Foreign Exchange Risk Premia and Macroeconomic Announcements: Evidence from Overnight Currency Options," Unpublished Dissertation Chapter.
  22. Guimaraes-Filho, R. and G. H. Hong. 2016. Dynamic Connectedness of Asian Equity Markets. IMF Working Paper, no. 16/57.
  23. Gulen, H. and M. Ion. 2016. "Policy Uncertainty and Corporate Investment," Review of Financial Studies, vol. 29, no. 3, pp. 523-564. https://doi.org/10.1093/rfs/hhv050
  24. Hassett, K. A. and G. E. Metcalf. 1999. "Investment with Uncertain Tax Policy: Does Random Tax Policy Discourage Investment?," Economic Journal, vol. 109, no. 457, pp. 372-393. https://doi.org/10.1111/1468-0297.00453
  25. Kelly, B., Pastor, L. and P. Veronesi. 2016. "The Price of Political Uncertainty: Theory and Evidence from the Option Market," Journal of Finance, vol. 71, no. 5, pp. 2417-2480. https://doi.org/10.1111/jofi.12406
  26. Klosner, S. and R. Sekkel. 2014. "International Spillovers of Policy Uncertainty," Economics Letters, vol. 124, no. 3, pp. 508-512. https://doi.org/10.1016/j.econlet.2014.07.015
  27. Koop, G., Pesaran, M. H. and S. M. Potter. 1996. "Impulse Response Analysis in Nonlinear Multivariate Models," Journal of Econometrics, vol. 74, no. 1, pp. 119-147. https://doi.org/10.1016/0304-4076(95)01753-4
  28. Leduc, S. and Z. Liu. 2015. Uncertainty Shocks are Aggregate Demand Shocks. Federal Reserve Bank of San Francisco Working Paper, no. 2012-10.
  29. Lyons, R. 1998. Options and the Currency Risk Premium. In Chen, Z. (ed.) Currency Options and Exchange Rate Economics. Singapore: World Scientific. pp. 94-107.
  30. Meese, R. and K. Rogoff. 1983. "Empirical Exchange Rate Models of the Seventies," Journal of International Economics, vol. 14, no. 1-2, pp. 3-24. https://doi.org/10.1016/0022-1996(83)90017-X
  31. Pastor, L. and P. Veronesi. 2012. "Uncertainty About Government Policy and Stock Prices," Journal of Finance, vol. 67, no. 4, pp. 1219-1264. https://doi.org/10.1111/j.1540-6261.2012.01746.x
  32. Pesarana, H. H. and Y. Shin. 1998. "Generalized Impulse Response Analysis in Linear Multivariate Models," Economics Letters, vol. 58, no. 1, pp. 17-29. https://doi.org/10.1016/S0165-1765(97)00214-0
  33. Rodrik, D. 1991. "Policy Uncertainty and Private Investment," Journal of Development Economics, vol. 36, no. 2, pp. 229-242. https://doi.org/10.1016/0304-3878(91)90034-S
  34. Schwert, W. 1989. "Why Does Stock Market Volatility Change Over Time?," Journal of Finance, vol. 44, no. 5, pp. 1115-1153. https://doi.org/10.1111/j.1540-6261.1989.tb02647.x