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Determinants of real exchange rate movements in 15 emerging market economies

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  • Goda, Thomas
  • Priewe, Jan

Abstract

Previous work has established that an appreciation of the real exchange rate (REER) contributes to premature deindustrialization, less productive investment and dependence on commodity booms and busts in emerging markets economies (EME). From the previous literature, it is less clear however what the most important drivers for the cyclical REER movements in EME are. The main aim of this study is to provide empirical evidence about the determinants of the REER movements of 15 emerging markets during the last two decades, using statistical analysis and a dynamic panel fixed effects model approach. Our analysis shows that although "commodity" and "industrial" EME are heterogeneous, REER volatility tends to be higher among the former. Yet, REER volatility between emerging and advanced countries does not differ very much, apart from a few EME countries. Countries that had more stable REER trend fared better than those that had a depreciating or appreciating trend (with the notable exception of China). As theoretically expected, commodity prices are an important structural driver of REER movements in "commodity EME". Moreover, the results confirm the existence of the Harrod-Balassa-Samuelson effect, and show the importance of financial inflows. Further, exchange rate regimes and the intervention of central banks were partially successful to avoid more substantial appreciations (depreciations). Finally, we find that lower country risk and, at least in some periods, growing broad money has led to REER appreciations.

Suggested Citation

  • Goda, Thomas & Priewe, Jan, 2019. "Determinants of real exchange rate movements in 15 emerging market economies," IPE Working Papers 128/2019, Berlin School of Economics and Law, Institute for International Political Economy (IPE).
  • Handle: RePEc:zbw:ipewps:1282019
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    Cited by:

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    2. Bruno Thiago Tomio & Guillaume Vallet, 2021. "Carry Trade and Negative Policy Rates in Switzerland : Low-lying fog or storm ?," Post-Print halshs-03669561, HAL.
    3. Bruno Thiago Tomio, 2020. "Carry trade in developing and developed countries: A Granger causality analysis with the Toda-Yamamoto appr," Economics Bulletin, AccessEcon, vol. 40(3), pages 2154-2164.
    4. Okot, Anjelo & Kaltenbrunner, Annina & Perez Ruiz, Daniel, 2022. "Determinants of the exchange rate, its volatility and currency crash risk in Africa's low and lower middle-income countries," EIB Working Papers 2022/12, European Investment Bank (EIB).

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    More about this item

    Keywords

    Real Exchange Rate; Foreign Exchange Rate Policy; Commodity Prices; CapitalInflows; Global Risk;
    All these keywords.

    JEL classification:

    • F6 - International Economics - - Economic Impacts of Globalization
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O57 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Comparative Studies of Countries
    • P52 - Political Economy and Comparative Economic Systems - - Comparative Economic Systems - - - Comparative Studies of Particular Economies

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