Modelling Exchange Rate Volatility by Macroeconomic Fundamentals in Pakistan

Jabeen, Munazza; Khan, Saud Ahmad

doi:10.33818/ier.278035

Cited by 7 publications

(11 citation statements)

References 25 publications

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“…For example, Monica and Santhiyavali (2017) and Bouraoui and Phisuthtiwatcharavong (2015) confirmed that foreign exchange reserves significantly affect ERV. This result is in line with the findings of Jabeen and Khan (2014) and Khan (2013) that showed a long-run relationship between FXRES and ERV. However, Bayat et al (2014) examined the asymmetric nexus between the said variables and found that foreign reserves do not affect nominal exchange rates.…”

Section: Literature Reviewsupporting

confidence: 92%

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Empirical determinants of exchange-rate volatility: evidence from selected Asian economies

Rashid

Basit

2021

JCEFTS

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Purpose This paper aims to explore the empirical determinants of exchange-rate volatility (ERV) in selected Asian economies, namely, Bangladesh, China, India, Indonesia, Malaysia and Pakistan. Specifically, it examines how the volatility of foreign reserves, government spending, industrial production, gold prices and terms of trade affect monthly ERV during the examined period. Design/methodology/approach The authors carry out the empirical analysis by using monthly data for the period January 1997–March 2019. First, the volatility of the underlying variables is measured based on the conditional variances obtained by estimating the univariate (generalized) autoregressive conditional heteroskedasticity [(G)ARCH] model for each variable during the study period. Next, the autoregressive conditional heteroscedasticity (ARCH)-Lagrange multiplier test is applied to ensure that there are no remaining ARCH effects in the residuals. Finally, the multivariate autoregressive-moving average-GARCH (1, 1) models are estimated to examine whether and how the volatility of the underlying variables affects ERV. Findings The results reveal that the current period volatility of exchange rates is significantly affected by ERV in the previous period in all selected countries. The results also indicate that the volatilities of the underlying macroeconomic variables are quite differently related to ERV in examined Asian countries. Foreign-reserve volatility (VFXRES) has negative and significant impacts on ERV in Bangladesh, China and Malaysia. Government-spending volatility is negatively related to ERV in India, whereas it is positively related to ERV in all other examined countries. The results also suggest that although terms-of-trade volatility reduces ERV in both Bangladesh and Pakistan, it amplifies ERV in the remaining examined countries. However, gold-price volatility (VGOLDP) significantly, positively contributes to ERV in Bangladesh, Indonesia and Malaysia. On the contrary, the higher volatility in industrial production (VIPI) results in lower ERV in Indonesia and Pakistan, whereas it increases ERV in China, India and Malaysia. Practical implications The findings have several important policy implications. First, the findings suggest that both Bangladesh and Malaysia should keep an adequate level of foreign reserves to stabilize their foreign exchange rates. Second, as government-spending volatility has a vital role in determining ERV, it is necessary to bring sustainability and continuity in government expenditures. Bangladesh and Pakistan can stabilize their foreign exchange rates by making exports more competitive, viable and accessible. Originality/value This paper significantly contributes to the existing literature by exploring how the behavior of unexpected variations in the factors determining exchange rates affects ERV in selected Asia countries. Most of the published studies have examined the determinants of exchange rates by considering the macroeconomic variables at their levels. Departing from the existing studies, this paper significantly relates the volatility (second moment) of exchange rate determinants to the behavior of ERV. Further, this paper provides firsthand empirical evidence on this issue for the selected Asian economies.

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Section: Literature Reviewsupporting

confidence: 92%

“…Chipili (2012) applied the same model and found a negative relationship between ERV and trade openness, suggesting more diversification in trade openness reduces fluctuations in exchange rates. However, Jabeen and Khan (2014) found a negative relationship between output volatility and ERV.…”

Section: Literature Reviewmentioning

confidence: 90%

Empirical determinants of exchange-rate volatility: evidence from selected Asian economies

Rashid

Basit

2021

JCEFTS

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“…MPOFU other two are insignificant. Jabeen and Khan (2014) also find insignificant results using monthly data and GARCH methods. However, these studies provide results based on high-frequency data, which differ with the theoretical model of Hau (2002), which states that the inverse relationship between real exchange rate volatility and trade openness occurs when using low-frequency data set.…”

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confidence: 95%

The determinants of real exchange rate volatility in South Africa

Mpofu

2020

World Economy

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Increasing financial liberalisation since the collapse of the Bretton Woods system in the 1970s has rendered exchange rates volatile in both developed and developing countries. As a result, the causes and effects of exchange rate volatility have become of interest to both researchers and policymakers. This paper focuses on the causes of medium to long-run real exchange rate volatility for South Africa's currency (the rand). This kind of study is important because medium to long-run real exchange rate volatility raises the risks associated with investment in the tradable sector and is detrimental to long-term economic growth. For instance, there is evidence in South Africa of exchange rate volatility having significant effect on macroeconomic factors such as employment and trade (

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“…In the recent past, researchers indeed have focused on macroeconomic volatility (see, for instance, Ramey and Ramey, 2005). Yet only a few empirical studies analyzed the interlinkages between various macro-level volatilities (Morana, 2009;Jabeen and Khan, 2014). The empirical literature on the interlinkages between VRER, VCPI, VLMI, and VINT remained silent.…”

Section: Introductionmentioning

confidence: 99%

“…Kholdy and Sohrabian (1990) reported the causal relationship running from wholesale prices to ER. Jabeen and Khan (2014) documented that VRER is influenced by several macroeconomic volatilities. Similarly, Morana (2009) argued that there is a linkage between ER and macroeconomic volatility, namely VLMI and VCPI.…”

Section: Introductionmentioning

confidence: 99%