Economic integration and exchange market pressure in a policy uncertain world

Abstract

This study examines the influence of economic integration, both real and financial, on exchange market pressure (EMP), along with considering external monetary and economic policy uncertainties. Our analysis is based on a group of Asian emerging markets over the period 2000–2018, which covers the global financial crisis and taper tantrum episodes, which have heightened monetary and economic policy uncertainty. By bringing improvements in modeling, and EMP measurement, a time series analysis shows an overall buffering role of real and financial integration on EMP, albeit with a country-level heterogeneity. Similarly, there is a country-level heterogeneity in the foreign exchange market response to monetary and economic policy uncertainties with surging effects in most cases. These results are supported by a panel analysis and remain robust during the global financial crisis. This research highlights that the current trend of deglobalization may hamper the stabilizing benefit of economic integration given the global policy uncertainty in the foreign exchange market.