Economic Policy Uncertainty and Dollar Rupee Exchange Rate Volatility

In this study, I constructed a news based economic policy uncertainty (EPU) index for Pakistan using an unsupervised algorithm and natural language processing (NLP) techniques that does not requires any human classified pre-labelled data. For that purpose, I extracted newspaper articles through Web-scraping from three leading English-language newspapers of Pakistan i.e. Dawn, Times of Pakistan and The Frontier Post and then got two separate indices based on their time frame. The two indices are highly correlated moving together and capturing the impact of multiple events such as: the floods of 2010; high terrorism activity; heightened exchange rate volatility; political turmoil; the IMF program of 2019, and most recently the COVID-19 pandemic. Once I have developed this news based EPU index for Pakistan based upon our proposed algorithm, I used this index as an uncertainty measure to evaluate the impact of economic policy uncertainty (EPU) on Dollar Rupee exchange rate volatility by estimating a Regression model using USD/Pak-Rupee returns by controlling the impact of market uncertainty and general Economic uncertainty. However, the findings of this study reveals that the impact of market uncertainty is insignificant and general economic uncertainty impact on Dollar to Rupee exchange rate fluctuations is modest only when the economy is performing poorly while negative economic growth increases exchange rate fluctuations. Nevertheless, Economic Policy Uncertainty has a major impact on Dollar to Rupee exchange rate volatility