Do COVID-19 Vaccinations Stabilize Foreign Exchange Markets? Global Evidence

The existing studies have offered evidence that the widespread of COVID-19 is associated with an increase in global foreign exchange volatility. Can vaccination efforts help to mitigate these adverse effects? Our paper turns to this new question by investigating the impact of vaccinations on the realized volatility of exchange rates in 30 countries/regions from January 1, 2020, to September 29, 2021. Using the Heterogeneous Autoregressive model with measurement errors (HARQ), we show that COVID-19 vaccine rollout contributes to stabilizing the global FX market. This stabilizing effect survives a battery of robustness tests. The impact of vaccinations is relatively stronger in emerging markets, in countries with high economic policy uncertainty, and in nations with greater vaccine confidence.