Monetary policy uncertainty impacts exchange rates: dollar appreciation and depreciation.
The research shows that changes in uncertainty affect the exchange rate and currency market returns. When monetary policy uncertainty increases, the dollar strengthens in the medium term, while higher productivity volatility leads to a weaker dollar. A theory based on the relationship between monetary policy and uncertainty helps explain these patterns. The model aligns with real-world data, indicating that risk factors and interest-rate smoothing play a role in exchange rate movements.