MACROECONOMIC INDICATORS CONTRIBUTING TOWARDS EXCHANGE RATE VOLATILITY: EVIDENCE FROM INCOME GROUPS OF THE COUNTRIES
The focus of the study is to explore the macroeconomic factors contributing towards exchange rate volatility in group of economies segregated on the basis of income. Further analysis is extended to identify the role of underlying macroeconomic indicators in explaining the exchange rate behavior at level. The Panel ARDL cointegration and Panel Granger Causality Test are employed on annual data sets for the period 1995-2015. The results of the separate analysis have been compared in first place on the basis of determinants of exchange rate volatility and the determinants of exchange rate level and secondly on the basis of income groups of the countries (high income, middle income and low income). The results provide the evidence that exchange rate behavior both in terms of volatility and at level is entirely governed by the selected set of macroeconomic indicators in all three panel data sets. The findings of the study validated the fundamentals based macroeconomic models of exchange rate determination and suggested that macroeconomic fundamentals played important role in derivation of exchange rate volatility as well as exchange rate level. Moreover response of exchange rate volatility and exchange rate level to the different macroeconomic indicators has been observed very sensitive to the income level of the countries. The comparison of the factors of exchange rate volatility and exchange rate level will enhance exposure about the policies concerned about exchange rate behavior.
Ahmad, Eatzaz, and Saima Ahmed Ali. "Exchange rate and inflation dynamics." The Pakistan Development Review (1999): 235-251.
Aizenman, Joshua, and Daniel Riera-Crichton. "Real exchange rate and international reserves in an era of growing financial and trade integration." The Review of Economics and Statistics 90, no. 4 (2008): 812-815.
Ali, Tariq Mahmood, Muhammad Tariq Mahmood, and Tariq Bashir. "Impact of interest rate, inflation and money supply on exchange rate volatility in Pakistan." World Applied Sciences Journal 33, no. 4 (2015): 620-630.
Aliyu, Shehu Usman Rano. "Impact of oil price shock and exchange rate volatility on economic growth in Nigeria: An empirical investigation." MPRA Paper No. 16319, Munich: University Library of Munich, Germany, 2009: 4-15.
Arabi, Khalafalla Ahmed Mohamed. "Estimation of exchange rate volatility via GARCH model case study Sudan (1978-2009)." International Journal of Economics and Finance 4, no. 11 (2012): 183-192.
Arize, Augustine C., Thomas Osang, and Daniel J. Slottje. "Exchange-rate volatility and foreign trade: evidence from thirteen LDC's." Journal of Business & Economic Statistics 18, no. 1 (2000): 10-17.
Arize, Augustine C., Thomas Osang, and Daniel J. Slottje. "Exchange-rate volatility in Latin America and its impact on foreign trade." International Review of Economics & Finance 17, no. 1 (2008): 33-44.
Arratibel, Olga, Davide Furceri, Reiner Martin, and Aleksandra Zdzienicka. "The effect of nominal exchange rate volatility on real macroeconomic performance in the CEE countries." Economic Systems 35, no. 2 (2011): 261-277.
Aydin, Burcu. Exchange rate assessment for sub-Saharan economies. No. 10-162. International Monetary Fund, 2010.
Azeez, B. A., Funso T. Kolapo, and L. B. Ajayi. "Effect of exchange rate volatility on macroeconomic performance in Nigeria." Interdisciplinary journal of contemporary research in business 4, no. 1 (2012): 149-155.
Azid, Toseef, Muhammad Jamil, Aneela Kousar, and M. Ali Kemal. "Impact of exchange rate volatility on growth and economic performance: A case study of Pakistan, 1973-2003." The Pakistan development review (2005): 749-775.
Babtlett, M. S. "Smoothing periodograms from time-series with continuous spectra." Nature 161, no. 4096 (1948): 686-687.
Benetrix, Agustin S., and Philip R. Lane. "Fiscal shocks and the real exchange rate." International Journal of Central Banking 9, no. 3 (2013): 6-37.
Bilson, John FO. "The monetary approach to the exchange rate: some empirical evidence." IMF Staff Papers 25, no. 1 (1978): 48-75.
Bobai, Francis Danjuma, Shuaibu Ubangida, and Y. S. Umar. "An assessment of exchange rate volatility and inflation in Nigeria." Journal of Emerging Issues in Economics, Finance and Banking 1, no. 4 (2013): 321-340.
Bravo-Ortega, Claudio, and Julian Di Giovanni. "Remoteness and real exchange rate volatility." IMF Staff Papers 53, no. 1 (2006): 115-132.
Cakrani, Edmira, Pranvera Resulaj, and Luciana Koprencka. "Government spending and real exchange rate case of Albania." European Journal of Sustainable Development 2, no. 4 (2013): 303-310.
Calderon, Cesar Augusto, Alberto Chong, and Norman V. Loayza. "Determinants of current account deficits in developing countries." The BE Journal of Macroeconomics 2, no. 1 (2002).
Calderon, Cesar. "Trade openness and real exchange rate volatility: panel data evidence." Working Paper 294. Central Bank of Chile, 2004.
Canzoneri, Matthew B., Robert E. Cumby, and Behzad Diba. "Relative labor productivity and the real exchange rate in the long run: evidence for a panel of OECD countries." Journal of international economics 47, no. 2 (1999): 245-266.
Choudhri, Ehsan U., and Mohsin S. Khan. "Real exchange rates in developing countries: are Balassa-Samuelson effects present?." IMF Staff Papers 52, no. 3 (2005): 387-409.
Chowdhury, Mohammad, and Md Hossain. "Determinants of exchange rate in Bangladesh: A case study." Journal of Economics and Sustainable Development 5, no. 1 (2014).
Christiansen, Lone Engbo, Mr Alessandro Prati, Mr Luca Antonio Ricci, and Mr Thierry Tressel. External balance in low income countries. Working Paper. No. 9-221. International Monetary Fund, 2009.
Christopoulos, Dimitris K., Karine Gente, and Miguel A. León-Ledesma. "Net foreign assets, productivity and real exchange rates in constrained economies." European Economic Review 56, no. 3 (2012): 295-316.
Cottani, Joaquin A., Domingo F. Cavallo, and M. Shahbaz Khan. "Real exchange rate behavior and economic performance in LDCs." Economic Development and cultural change 39, no. 1 (1990): 61-76.
Devereux, Michael B., and Philip R. Lane. "Understanding bilateral exchange rate volatility." Journal of International Economics 60, no. 1 (2003): 109-132.
Dhasmana, Anubha. "India’s real exchange rate and trade balance: Fresh empirical evidence." IIM Bangalore Research Paper 373 (2012).
Diallo, Ibrahima Amadou. "Exchange rate volatility and investment: a panel data cointegration approach." Expert Journal of Economics 3, no. 2 (2015): 127-135.
Diamandis, Panayiotis F., Anastassios A. Drakos, and Georgios P. Kouretas. "Exchange Rates, Fundamentals, and Nonlinearities: A Review and Some Further Evidence from a Century of Data." In International Symposia in Economic Theory and Econometrics, vol. 23, pp. 85-124. Emerald Publishing Ltd, 2014.
Dlamini, Bongani P. "Exchange rate volatility and its effect on macroeconomic management in Swaziland." Central Bank of Swaziland, 2014.
Domaç, Ilker, and Alfonso Mendoza. Is there room for foreign exchange interventions under an inflation targeting framework? Evidence from Mexico and Turkey. World Bank Policy Research, Working Paper No. 3288. The World Bank, 2004.
Dornbusch, Rudiger. "Expectations and exchange rate dynamics." Journal of political Economy 84, no. 6 (1976): 1161-1176.
Ebaidalla, Ebaidalla Mahjoub. "Real exchange rate misalignment and economic performance in Sudan." African Review of Economics and Finance 6, no. 2 (2014): 115-140.
Eichengreen, Barry. "The real exchange rate and economic growth." Social and Economic Studies 56, no. 4 (2007): 7-20.
Engel, Charles, and Kenneth D. West. "Exchange rates and fundamentals." Journal of political Economy 113, no. 3 (2005): 485-517.
Engle, Robert F., and Clive WJ Granger. "Co-integration and error correction: representation, estimation, and testing." Econometrica: journal of the Econometric Society (1987): 251-276.
Esquivel, Gerardo, and Felipe Larraín B. "The impact of G-3 exchange rate volatility on developing countries." G-24 Discussion Paper Series. United Nations Conference on Trade and Development No. 16. Centre for International Development Harvard University, 2002.
Frenkel, Jacob A. "A monetary approach to the exchange rate: doctrinal aspects and empirical evidence." The scandinavian Journal of economics (1976): 200-224.
Gala, Paulo. "Real exchange rate levels and economic development: theoretical analysis and econometric evidence." Cambridge Journal of economics 32, no. 2 (2007): 273-288.
Giannellis, Nikolaos, and Athanasios P. Papadopoulos. "What causes exchange rate volatility? Evidence from selected EMU members and candidates for EMU membership countries." Journal of International Money and Finance 30, no. 1 (2011): 39-61.
Granger, Clive WJ. "Some properties of time series data and their use in econometric model specification." Journal of econometrics 16, no. 1 (1981): 121-130.
Grossmann, Axel, Inessa Love, and Alexei G. Orlov. "The dynamics of exchange rate volatility: A panel VAR approach." Journal of International Financial Markets, Institutions and Money 33 (2014): 1-27.
Grydaki, Maria, and Stilianos Fountas. "Exchange rate volatility and output volatility: a theoretical approach." Review of International Economics 17, no. 3 (2009): 552-569.
Hadri, Kaddour. "Testing for stationarity in heterogeneous panel data." The Econometrics Journal 3, no. 2 (2000): 148-161.
Hau, Harald. "Real exchange rate volatility and economic openness: theory and evidence." Journal of money, Credit and Banking (2002): 611-630.
Hodrick, Robert J. "An Empirical Analysis of the Monetary Approach to the Determination of the Exchange Rate ." The economics of exchange rates (1978): 97-116.
Hviding, Ketil, Nowak, Mr M., and Mr Luca Antonio Ricci. Can higher reserves help reduce exchange rate volatility?. IMF Working Paper No. 4-189. International Monetary Fund, 2004.
Iavorschi, Mihaela. "The influence of Foreign direct investments and the current account of the balance of payments on the evolution of the Lei/Euro exchange rate in Romania." Procedia Economics and Finance 16, no. 4 (2014): 448-457.
Im, Kyung So, M. Hashem Pesaran, and Yongcheol Shin. "Testing for unit roots in heterogeneous panels." Journal of econometrics 115, no. 1 (2003): 53-74.
Kamin, Steve B., and John H. Rogers. "Output and the real exchange rate in developing countries: an application to Mexico." Journal of development economics 61, no. 1 (2000): 85-109.
Kandil, Magda, and Ida Mirzaie. "The effects of exchange rate fluctuations on output and prices: evidence from developing countries." The Journal of Developing Areas (2005): 189-219.
Kasman, Adnan, and Duygu Ayhan. "Foreign exchange reserves and exchange rates in Turkey: Structural breaks, unit roots and cointegration." Economic Modelling 25, no. 1 (2008): 83-92.
Kearney, Colm, and Ronald MacDonald. "Rational expectations, bubbles and monetary models of the exchange rate: the Australian/US dollar rate during the recent float." Australian Economic Papers 29, no. 54 (1990): 1-20.
Kemal, M. Ali, and Usman Qadir. "Real exchange rate, exports, and imports movements: A trivariate analysis." The Pakistan Development Review (2005): 177-195.
Khan, Abdul Jalil, Parvez Azim, and Shabib Haider Syed. "The impact of exchange rate volatility on trade: A panel study on Pakistan's trading partners." The Lahore Journal of Economics 19, no. 1 (2014): 31-66.
Khan, Rana Ejaz Ali, Rashid Sattar, and Hafeez Rehman. "Effectiveness of exchange rate in Pakistan: Causality analysis." Pak. J. Commer. Soc. Sci 6, no. 1 (2012): 83-96.
Khraiche, Maroula, and Jeffrey Gaudette. "FDI, exchange rate volatility and financial development: regional differences in emerging economies." Economics Bulletin 33, no. 4 (2013): 3143-3156.
Kilicarslan, Zerrin. "Determinants of exchange rate volatility: empirical evidence for Turkey." Journal of Economics, Finance and Accounting 5, no. 2 (2018): 204-2013.
Kim, Benjamin JC, and Soowon Mo. "Cointegration and the long-run forecast of exchange rates." Economics letters 48, no. 3-4 (1995): 353-359.
Lee‐Lee, Chong, and Tan Hui‐Boon. "Macroeconomic factors of exchange rate volatility." Studies in Economics and Finance 24, no. 4 (2007), 266-285.
Levin, Andrew, Chien-Fu Lin, and Chia-Shang James Chu. "Unit root tests in panel data: asymptotic and finite-sample properties." Journal of econometrics 108, no. 1 (2002): 1-24.
MacDonald, Ronald. "Exchange rate behaviour: are fundamentals important?." The Economic Journal 109, no. 459 (1999): 673-691.
Madesha, Wellington, Clainos Chidoko, and James Zivanomoyo. "Empirical test of the relationship between exchange rate and inflation in Zimbabwe." Journal of economics and sustainable development 4, no. 1 (2013): 52-58.
Mahmood, Iqbal, Major Ehsanullah, and Ahmed Habib. "Exchange rate volatility & macroeconomic variables in Pakistan." Business management dynamics 1, no. 2 (2011): 11-22.
Mark, Nelson C., and Donggyu Sul. "Nominal exchange rates and monetary fundamentals: evidence from a small post-Bretton Woods panel." Journal of international economics 53, no. 1 (2001): 29-52.
McPherson, Malcolm F., and Tzvetana Rakovski. Exchange rates and economic growth in Kenya: an econometric analysis. Papers 651. Harvard Institute for International Development, 1998.
Meese, Richard A., and Kenneth Rogoff. "Empirical exchange rate models of the seventies: Do they fit out of sample?." Journal of international economics 14, no. 1-2 (1983a): 3-24.
Meese, Richard, and Kenneth Rogoff. "The out-of-sample failure of empirical exchange rate models: sampling error or misspecification?." In Exchange rates and international macroeconomics, pp. 67-112. University of Chicago Press, 1983b.
Morana, Claudio. "On the macroeconomic causes of exchange rate volatility." International Journal of Forecasting 25, no. 2 (2009): 328-350.
Newey, Whitney K., and Kenneth D. West. "Automatic lag selection in covariance matrix estimation." The Review of Economic Studies 61, no. 4 (1994): 631-653.
Ojo, Ade T., and Philip O. Alege. "Exchange rate fluctuations and macroeconomic performance in sub-Saharan Africa: A dynamic panel cointegration analysis." Asian Economic and Financial Review 4, no. 11 (2014): 1573-1591.
Pesaran, M. Hashem, Yongcheol Shin, and Ron P. Smith. "Pooled mean group estimation of dynamic heterogeneous panels." Journal of the American statistical Association 94, no. 446 (1999): 621-634.
Prabheesh, K. P., D. Malathy, and R. Madhumathi. "Demand for foreign exchange reserves in India: a co-integration approach." (2007): 36-46.
Ramasamy, Ravindran, and Soroush Karimi Abar. "Influence of macroeconomic variables on exchange rates." Journal of economics, Business and Management 3, no. 2 (2015): 276-281.
Rapach, David E., and Mark E. Wohar. "Testing the monetary model of exchange rate determination: new evidence from a century of data." Journal of International Economics 58, no. 2 (2002): 359-385.
Rapetti, Martin, Peter Skott, and Arslan Razmi. "The real exchange rate and economic growth: are developing countries different?." International Review of Applied Economics 26, no. 6 (2012): 735-753.
Rashidin, Md Salamun, Irfan Ullah, and Mahad Jehangir. "The Influence of Balance of Payments and Balance of Trade on Exchange Rate in Developing Countries of Asia: A Case study of Bangladesh, Pakistan and India." Sonargaon University Journal 1, no. 2 (2017).
Rehman, Mushtaq. "Analysis of Exchange Rate Fluctuations: A Study of PKR VS USD." Journal of Managerial Sciences 8, no. 1 (2014): 41-60.
Ricci, Luca Antonio, Gian Maria Milesi‐Ferretti, and Jaewoo Lee. "Real exchange rates and fundamentals: a cross‐country perspective." Journal of Money, Credit and Banking 45, no. 5 (2013): 845-865.
Saeed, Ahmed, Rehmat Ullah Awan, Maqbool H. Sial, and Falak Sher. "An econometric analysis of determinants of exchange rate in Pakistan." International Journal of Business and Social Science 3, no. 6 (2012): 184-196.
Santacreu, Ana Maria. "The economic fundamentals of emerging market volatility." Economic Synopses 2, The Federal Reserve Bank of St. Louis: 2015.
Schwarz, Gideon. "Estimating the dimension of a model." The annals of statistics 6, no. 2 (1978): 461-464.
Sekmen, Fuat. "Cointegration and causality among foreign direct investment in tourism sector, GDP, and exchange rate volatility in Turkey." The Empirical Economics Letters 6, no. 1 (2007): 53-58.
Senadza, Bernardin, and Desmond Delali Diaba. "Effect of exchange rate volatility on trade in Sub-Saharan Africa." Journal of African Trade 4, no. 1-2 (2017): 20-36.
Serven, Luis. "Real-exchange-rate uncertainty and private investment in LDCs." Review of Economics and Statistics 85, no. 1 (2003): 212-218.
Stavarek, Daniel, and Cynthia Miglietti. "Effective exchange rates in central and Eastern European Countries: Cyclicality and relationship with macroeconomic fundamentals." Review of Economic Perspectives 15, no. 2 (2015): 157-177.
Supaat, Saktiandi, A. Phang Seow Jiun, NG HENG Tiong, and E. D. W. A. R. D. Robinson. "Investigating the relationship between exchange rate volatility and macroeconomic volatility in Singapore." MAS Staff Paper 25. Monetary Authority of Singapore, 2003.
Udoh, Edet Joshua, Sunday Brownson Akpan, Daniel Etim John, and Inimfon Vincent Patrick. "Cointegration between exchange rate volatility and key macroeconomic fundamentals: evidence from Nigeria." Modern Economy 3, no. 7 (2012): 846.
Vijayakumar, Sinnathurai. "The effects of exchange rate on the trade balance in the Sri Lankan context after post liberalization." International Journal on Global Business Management and Research 2, no. 2 (2014): 1-12.
Vitek, Francis. An assessment of external price competitiveness for Mozambique. Working Paper No. 9-165. International Monetary Fund, 2009.
Vygodina, Anna V., Thomas S. Zorn, and Richard DeFusco. "Asymmetry in the effects of economic fundamentals on rising and falling exchange rates." International Review of Financial Analysis 17, no. 4 (2008): 728-746.
Williams, A. Paul, and S. Prasad. "A Study on the Exchange Rate Determinants of Selected Asian Countries’ Currencies." International Journal of Advanced Science and Technology 28, no. 19 (2019): 1202-1207.
Yaya, Mehmet E., and Xiaoxia Lu. "The short-run relationship between real effective exchange rate and balance of trade in China." International Journal of Applied Economics 9, no. 1 (2012): 15-27.
Yunana, T. W., W. R. Mato, Yunana Titus Wuyah, and Wada Rantan Mato. "Economic Implications of Exchange Rate Volatility on Macroeconomic Variables in Nigeria." International Journal of Original Research 2, no. 3 (2016): 116-123.
Zakaria, Zukarnain. "The relationship between export and exchange rate volatility: Empirical evidence based on the trade between Malaysia and its major trading partners." Journal of Emerging Issues in Economics, Finance and Banking 2, no. 2 (2013): 668-684.