Euro area uncertainty and Euro exchange rate volatility: Exploring the role of transnational economic policy

Abstract

This study examines the relationship between economic policy uncertainty and Euro area exchange rate volatility, focusing on transnational Euro area uncertainty. The study introduces a novel index that captures uncertainty related to Euro area integration. The index is constructed using both traditional and advanced textual analysis methods. By employing a quantile regression framework, findings show that Euro area uncertainty significantly impacts the euro exchange rate's volatility, while national economic policy uncertainty is generally insignificant. The study emphasizes the importance of considering both national and supranational uncertainties when analysing exchange rate volatility, contributing to the existing literature on this subject.