Shock Thy Neighbor : Economic Uncertainty and Exchange Rate

Abstract

The financial press linked Trump‘s political rhetoric to the depreciation of the Mexican peso. The massive trade volume of the peso/dollar currency pair obliges to investigate whether Trump‘s presidential campaign and regime, through uncertainty, cause fluctuations in the currency pair. This study finds that economic policy uncertainty (EPU) does not Granger cause the changes in the peso. However, a shock to the EPU produces a short-lived, statistically insignificant variation in the exchange rate. Also, EPU does not have a significant effect on the exchange rate beyond the first moment. EPU‘s lack of focus on trade, a central economic link between the US and Mexico, is a plausible reason for the result. The absence of an effect of EPU on the peso prevents any policy measure.