Threshold effects of openness on real and nominal effective exchange rates in emerging and developing economies

Abstract

Studying the determinants of exchange rates is important for understanding economic development, trade patterns, investment decisions and for recommending economic policies. Trade openness is one of the important factors that affect exchange rates. With increase in globalisation, economies around the world are more integrated through liberalised foreign trade policies

Openness and Real Exchange Rate Volatility: Evidence from China

“…In other words, the more liberalized a country’s capital account is, the less the pressure global shocks would impose on the foreign exchange rates. Besides, Keefe and Saha ( 2022 ) show financial openness–proxied by the KOF globalization index–can partially absorb the impact of domestic shocks, such as shocks to inflation, interest rate differentials, and government debt. Their threshold model regressions reveal that in less open economies, macro variables elicit larger responses in the real exchange rates; in highly open economies, such responses are negligible, if not nonexistent.…”