Determinants of Real Exchange Rate Movements in 15 Emerging Market Economies

34 Pages Posted: 2 Oct 2019

See all articles by Thomas Goda

Thomas Goda

Universidad EAFIT; Universidad EAFIT - School of Economics and Finance - Center for Research in Economic & Finance (CIEF)

Jan Priewe

HTW Berlin

Date Written: October 1, 2019

Abstract

Previous work has established that an appreciation of the real exchange rate (REER) con-tributes to premature deindustrialization, less productive investment and dependence on commodity booms and busts in emerging markets economies (EME). From the 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 countries. EME that had more stable REER 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, the interventions of central banks were partially successful to avoid more substantial appre-ciations (depreciations). Finally, we find that lower country risk and, at least in some peri-ods, growing broad money in OECD countries has led to REER appreciations in our sample countries.

Keywords: Real Exchange Rate; Foreign Exchange Rate Policy, Commodity Prices, Capital Inflows, Global Risk

JEL Classification: F6, F31, F41, O11, O57, P52

Suggested Citation

Goda, Thomas and Priewe, Jan, Determinants of Real Exchange Rate Movements in 15 Emerging Market Economies (October 1, 2019). Center for Research in Economics and Finance (CIEF), Working Papers, No. 19-13 2019, Available at SSRN: https://ssrn.com/abstract=3462693 or http://dx.doi.org/10.2139/ssrn.3462693

Thomas Goda (Contact Author)

Universidad EAFIT ( email )

School of Economics and Finance
Carrera 49 Número 7 Sur 50
Medellín, Antioquia -
Colombia
(57) (4) 2 61 95 00 - 8664 (Phone)

HOME PAGE: http://www.eafit.edu.co

Universidad EAFIT - School of Economics and Finance - Center for Research in Economic & Finance (CIEF) ( email )

Carrera 49 No. 7 South - 50
Bogotá
Colombia

Jan Priewe

HTW Berlin ( email )

Wilhelminenhofstraße 75A
Berlin, 12459
Germany

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