Exchange Rate Uncertainty and the German Labour Market: A Cointegration Application of the ARDL Approach

This paper empirically assesses the impact of OECD exchange rate uncertainty on German employment claimed by real option theory. Since orders of integration of regressors are not exactly known, a new bounds procedure is applied to test for cointegrating relationships among macroeconomic labour market variables and uncertainty. This procedure is efficient for small samples and capable of dealing with the controversial issue of exogeneity of uncertainty. Additionally, ARDL and error-correction models are estimated for employment and uncertainty as a forcing variable. Based on consistent estimates and standard normal asymptotic theory, negative short- and long-run impacts of uncertainty cannot be rejected.