Asymmetric Impact of Geopolitical Risk and Economic Policy Uncertainty on Russian Ruble Exchange Rate

Abstract

The Russian economy has encountered substantial exchange rate volatility due to many endogenous and exogenous shocks, including the global financial crisis, sanctions, and the COVID-19 pandemic. These exogenous shocks tend to increase economic policy uncertainty, eventually leading to exchange rate fluctuations. In addition, the Russian economy is highly exposed to geopolitical risks, which also reflected in the dynamics of the exchange rate. The hypothesis of the study is that the response of the exchange rate to the positive and negative shocks in geopolitical risk and economic policy uncertainty may be asymmetric because of the expectations of economic agents. Thus, the objective of this study is to assess the asymmetric impact of geopolitical risk and economic policy uncertainty on the Russian exchange rate. As a preliminary analysis, the time series were tested for unit root and cointegration. I apply linear and non-linear autoregressive and distributed lag models (ARDL) that estimate asymmetric impact and provide results in the short and long term. The results of econometric analysis show that geopolitical risk and economic policy uncertainty affect the exchange rate asymmetrically in the short term, while their impact on the exchange rate is symmetric in the long term. In the short term, the exchange rate is more sensitive to negative shocks of geopolitical risk and economic policy uncertainty as compared to positive ones. At the same time, the negative impact of geopolitical risk is smoothed out in the long term. The theoretical significance of the study lies in expanding the standard model of fundamental factors affecting the dynamics of the exchange rate by examining nexus between "unobservable" factors and the exchange rate. The findings make it possible to improve the predictability of the exchange rate, providing valuable policy implications for investors and policy-makers.