Economic policy uncertainty and exchange rates in emerging markets: Short and long runs evidence

We revisit the association between fundamentals and exchange rates in emerging markets relying on the role of the Economic Policy Uncertainty (EPU) in explaining /forecasting currency movements. Using ARDL model, we show that EPU plays a key role in explaining exchange rates in short and long runs. We also find that the EPU improves the forecasting power of macroeconomic models of exchange rate in both horizons. Our findings provide an empirical justification of the scapegoat theory.