Analysis of currency volatility from a macroeconomic perspective: the case of selected emerging market economies (EMEs) Online publication date: Mon, 18-Oct-2021
by Aadila Hoosain; Alta Joubert; Emmanuel Owusu-Sekyere
International Journal of Monetary Economics and Finance (IJMEF), Vol. 14, No. 5, 2021
Abstract: This paper explores the macroeconomic drivers of currency volatility in 15 selected emerging market economies (EMEs) using data from 2001Q1 to 2017Q3. We control for country heterogeneity and cross-sectional dependence of the error term using the least square dummy variable (LSDV) fixed effects and feasible generalised least squares (FGLS) by Parks (1967) and Kmenta (1986) in a sample wide estimation. Country specific estimations are also done using Swamy's random coefficients (RC) Estimator. In the sample wide estimation, we find that currency volatility in the selected EMEs is aggravated by persistence, government expenditure, financial deepening and very marginally interest rate differential. A favourable current account balance and economic growth alleviates currency volatility in these countries. However, there are country specific differences highlighting the need for policy differentiation in addressing currency volatility in individual EMEs.
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