The response of exchange rates to economic policy uncertainty: Evidence from Russia

Abstract

The Russian economy has encountered substantial exchange rate volatility due to many endogenous and exogenous shocks, including the adoption of different exchange rate systems, the global financial crisis, sanctions, and the COVID pandemic. The economy has long experience with a managed floating exchange rate system, which motivates us to investigate the exchange rate response to domestic economic policy uncertainty, incorporating oil prices and the trade volume under different economic circumstances. We apply quantile-based time-series approaches to deal with extreme values. Our empirical investigation demonstrates that the local currency appreciates in response to increased Russian economic policy uncertainty under different quantiles of the managed floating exchange rate, but it depreciates under most quantiles in a floating exchange rate period. Our findings confirm that the Russian currency appreciates with the rise in international oil prices and trade as Russia is an oil-exporting country. Moreover, the findings are robust under the quantile-on-quantile approach. © 2021 The Authors