Stabilizing global foreign exchange markets in the time of COVID-19: The role of vaccinations

Abstract

By restoring economic openness, mitigating economic policy uncertainty, and regaining macroeconomic stability, the mass deployment of COVID-19 vaccinations should stabilize foreign exchange (FX) markets. This paper empirically examines the impact of COVID-19 vaccinations on the realized volatility of exchange rates in 30 countries/regions from January 1, 2020, to September 29, 2021. Using the heterogeneous autoregressive model with measurement errors, we find that the COVID-19 vaccine rollout stabilizes global FX markets; this result holds through a series of robustness checks. The stabilizing effect is asymmetric across the quantile levels of FX volatility distribution. Furthermore, the stabilizing effect is more pronounced in emerging markets, countries with high economic policy uncertainty, and nations with greater vaccine confidence.