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 behaviour 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 behaviour.