Muhammad Akram Gilal

Controlling for macroeconomic indicators and trade openness, this study examined the impact of economic policy uncertainty on exchange market pressure for a panel of 25 countries from 2003Q2 to 2021Q3. The pooled mean group estimator, which allows for variation in short-run estimates and error variances but constrains long-run parameters to be the same, was employed to conduct the analysis. The overall panel was further split into developed, developing, and emerging economies panels to check if there was variation in the effect of economic policy uncertainty. Further, we split the entire sample into pre and post-GFC period to account for potential nonlinearity caused by the structural break (i.e., global financial crisis). Results indicate significant positive effect of economic policy uncertainty on EMP1. Economic policy uncertainty has larger impact on developing and emerging economies EMP1 than their developed counterparts entire sample period and all countries panel all sample periods. For EMP2 economic policy uncertainty has significant effect only for developing and emerging economies entire sample period. Furthermore, the effect of uncertainty in economic policy on EMP1 is larger in pre-GFC period than post-GFC period for all countries and developed economies panel. For developing and emerging economies, post-GFC is larger than pre-GFC period. All the remaining variables have mixed effect on either of the exchange market pressure indexes. .

Controlling for macroeconomic indicators and trade openness, this study examined the impact of economic policy uncertainty on exchange market pressure for a panel of 25 countries from 2003Q2 to 2021Q3. The pooled mean group estimator, which allows for variation in short-run estimates and error variances but constrains long-run parameters to be the same, was employed to conduct the analysis. The overall panel was further split into developed, developing, and emerging economies panels to check if there was variation in the effect of economic policy uncertainty. The results indicate the presence of long-run relationships among the variables for all panels. Economic policy uncertainty has a significant positive effect on the exchange market pressure of the overall panel and panel of developed, developing, and emerging economies. However, there is variation in the effect of economic policy uncertainty. It has a larger effect on the exchange market pressure of developed and emerging economies than on their developed counterparts. Other variables relevant in explaining exchange market pressure are gross domestic product for the overall panel and consumer price index, domestic credit, gross domestic product, real exchange rate, and trade openness for developing and emerging economies.

Interdependence in trade and financial globalization has increased the vulnerability of developed and developing countries to external shocks alike, whereas emerging markets are more vulnerable to the shocks originating from the world’s leading economies. This paper investigates the impact of the uncertainty from the global economic policy on the return of the Indonesian stock market by using the time-varying correlation based on the rolling window method and time-varying built dynamic conditional correlation method. Both the rolling window and condition correlation estimates indicate that the correlation between global policy uncertainty and Indonesian stock returns is time-varying. The results of the autoregressive distributed lag-based regression indicate that inflation, global crude oil prices, gross domestic product, and world crude oil production have significant impacts on the dynamic conditional correlation. The average negative estimate of time-varying correlation suggests that investors when faced with liquidity constraints in one country may sell off their assets in another country to raise funds in order to meet their future financial needs. This also indicates that the rise in the uncertainty of economic policy in developed markets has a negative impact on the shocks faced by the Indonesian stock market. Based on our empirical findings, it is recommended that Indonesian policymakers should place more focus on the sustainability of the economic growth, pay close attention to volatile crude oil prices, world crude oil production, and inflation so as to avoid dynamic interaction between the uncertainty of economic policy in the developed markets and the return of the Indonesian stock market.