Unveiling the causal impact of US economic policy uncertainty on exchange market pressure of African economies

• Published date: 01 February 2022
• Author: Godwin Olasehinde‐Williams,Ifedolapo Olanipekun
• Date: 01 February 2022
• DOI: http://doi.org/10.1002/pa.2278

ACADEMIC PAPER

Unveiling the causal impact of US economic policy uncertainty

on exchange market pressure of African economies

Godwin Olasehinde-Williams

1

| Ifedolapo Olanipekun

2

1

School of Economics and Management,

Nanchang University, China

2

Adeyemi College of Education, Ondo, Nigeria

Correspondence

Godwin Olasehinde-Williams, School of

Economics and Management, Nanchang

University, China.

Email: alanisey@gmail.com

One of the factors responsible for the growth of African economies is their interac-

tion with advanced economies such as the United States. In this regard, this study

investigated the causal linkages between the exchange market pressure (EMP) of

African economies and the economic policy uncertainty (EPU) of the United States. A

panel of nine African countries were studied from 1996 M01 to 2018 M12 using a

bootstrap Granger causality test because of its robustness to cross-sectional depen-

dence and heterogeneity. We found that US EPU Granger causes EMP in the panel

of African countries. At country level, we found causal relations running from US

EPU to EMP in Egypt, Ethiopia, Ghana, Kenya, Libya and South Africa. In Angola,

Morocco and Nigeria, EMP was independent of uncertainty in the United States. This

suggests that African countries need to be watchful of their reliance on the US econ-

omy as negative effects of policy uncertainty emanating from the US might be trans-

mitted to their economy through its influence in the exchange market.

JEL CLASSIFICATION

C33; F31; F42

1|INTRODUCTION

Continuous policy adjustments targeted at solving short-term macro-

economic challengesin the United States often result in economic pol-

icy uncertainty (EPU).This influences the behavior of economic agents

as their ability to predict the prospects and outcome of current deci-

sions taken gets trimmed. The growing connections between the

advanced economies and smaller economies raise concerns about the

likelihood of uncertainties spreading from influential economies to less

influential ones. Policymakers arenot only concerned about the extent

of the impact of these exogenous shocks on their economies but are

also concernedabout the transmission channels of suchshocks into the

macro-economy. The transmission channels of economic uncertainties

from a large economy into smaller economies mainly through external

sector variables of which the exchange rates and external reserves are

key. The exchangerates and external reserves arealso affected by fluc-

tuations in macroeconomic fundamentals, such as trade, investment

and price level,which are influenced by the stabilityof the international

economy, among others.

Increased uncertainty about the policy directions in a large econ-

omy is presumed to be responsible for economic cycles around the

world (Klößner & Sekkel, 2014). This has also led to the weakness of

currencies of smaller economies in the past. For instance, in 2018, fol-

lowing the US economic policy changes and trade threats to their

partners and competitors, some currencies such as the Argentine

peso, Brazilian real, Indian rupee, South African rand and Turkish lira

depreciated. Significant losses and weakening of currencies which

occurred simultaneously with the global financial crisis in 2008 were

also traced to the policy uncertainty surrounding the economic crisis

of 2007 in the United States. This led to a massive decline in inves-

tors’confidence as the economic stability of many nations was

affected. However, the different impacts of foreign uncertainty on

domestic economies largely depend on the differences in the channels

of external shocks transmission across the domestic countries. These

List of Abbreviations: EMP, Exchange market pressure; EPU, Economic policy uncertainty;

FDI, Foreign direct investment; GDP, Gross domestic product; IMF, International Monetary

Fund; US, United States; USEPU, United States’economic policy uncertainty.

Received: 17 December 2019 Revised: 24 May 2020 Accepted: 10 July 2020

DOI: 10.1002/pa.2278

J Public Affairs. 2022;22:e2278. wileyonlinelibrary.com/journal/pa © 2020 John Wiley & Sons, Ltd 1of9

https://doi.org/10.1002/pa.2278