Impact of Climate Policy Uncertainty on Exchange Rate Contagion

Abstract: This paper investigates the impact of climate policy uncertainty on contagion among international currencies. We use weekly data from August 2005 to December 2023. Our empirical approach involves estimating dynamic conditional correlations through DCC-GARCH model and examining the influence of financial uncertainty, geopolitical risk, health crises, and climate policy uncertainty on exchange rate correlations. We analyze the differential impact of these factors across various currency pairs. Results indicate that financial stress, the onset of the pandemic, and geopolitical risks have played significant roles in the past, with climate policy uncertainty also emerging as an important indicator impacting exchange contagion. Keywords: Exchange Rates; International Trade, Uncertainty, Climate Policy Uncertainty JEL classification number: F31, G15, Q54