Exchange rate uncertainty and economic fluctuations  in typical emerging economies

Nguyen Ba Trung

doi:10.46223/HCMCOUJS.econ.en.14.1.2729.2024

Abstract

This paper examines the role of Exchange Rate Uncertainty (ERU) in driving economic fluctuations in emerging economies using a VAR with stochastic volatility in the mean. We use the quarterly data of three typical emerging economies from 1972Q3 to 2009Q4 within a VAR model. We show that ERU plays a vital role in driving the business cycles of emerging economies. First, an ERU can provoke risks in the financial market and the real economy. Second, ERU hurts equity prices and the output growth of emerging economies. Further investigation shows that the adverse effects of ERU on output are more severe under the fixed exchange rate regime than under the flexible exchange rate regime. This finding implies that adopting the flexible exchange rate regime can help emerging economies mitigate the adverse effects of uncertainty shocks.

JEL codes

F21; F32; G15

Keywords

Bayesian VAR model; exchange rate uncertainty; emerging economies; stochastic volatility; uncertainty

Full Text:

PDF

Cite this paper as:

Nguyen, T. B. (2024). Exchange rate uncertainty and economic fluctuations in typical emerging economies. Ho Chi Minh City Open University Journal of Science – Economics and Business Administration, 14(1), 88-103. doi:10.46223/HCMCOUJS. econ.en.14.1.2729.2024

References

Aghion, P., Bacchetta, P., Rancière, R., & Rogoff, K. (2009). Exchange rate volatility and productivity growth: The role of financial development. Journal of Monetary Economics, 56(4), 494-513. doi:10.1016/j.jmoneco.2009.03.015

Amuedo-Dorantes, C., & Pozo, S. (2001). Exchange-rate uncertainty and economic performance. Review of Development Economics, 5(3), 363-74. doi:10.1111/1467-9361.00129

Andrieu, C., Doucet, A., & Holenstein, R. (2010). Particle markov chain Monte Carlo methods. Journal of the Royal Statistical Society: Series B (Statistical Methodology), 72(3), 269-342.

Arize, A. C., Osang, T., & Slottje, D. J. (2000). Exchange-rate volatility and foreign trade: Evidence from thirteen LDC’s. Journal of Business & Economic Statistics, 18(1), 10-17.

Arize, A. C., Osang, T., & Slottje, D. J. (2008). Exchange-rate volatility in Latin America and its impact on foreign trade. International Review of Economics & Finance, 17(1), 33-44. doi:10.1016/j.iref.2006.01.004

Arratibel, O., Furceri, D., Martin, R., & Zdzienicka, A. (2011). The effect of nominal exchange rate volatility on real macroeconomic performance in the CEE countries. Economic Systems, 35(2), 261-277. doi:10.1016/j.ecosys.2010.05.003

Atella, V., Atzeni, G. E., & Belvisi, P. L. (2003). Investment and exchange rate uncertainty. Journal of Policy Modeling, 25(8), 811-24. doi:10.1016/S0161-8938(03)00074-7

Bahmani-Oskooee, M., & Gelan, A. (2018). Exchange-rate volatility and international trade performance: Evidence from 12 African countries. Economic Analysis and Policy, 58(1), 14-21.

Bahmani-Oskooee, M., Kutan, A. M., & Xi, D. (2015). Does exchange rate volatility hurt domestic consumption? Evidence from emerging economies. International Economics, 144, 53-65. doi:10.1016/j.inteco.2015.05.002

Bailliu, J., Lafrance, R., & Perrault, J. F. (2003). Does exchange rate policy matter for growth? International Finance, 6(3), 381-414.

Baker, S. R., Bloom, N., & Davis, S. J. (2016). Measuring economic policy uncertainty. The Quarterly Journal of Economics, 131(4), 1593-1636. doi:10.1093/qje/qjw024

Barkoulas, J. T., Baum, C. F., & Caglayan, M. (2002). Exchange rate effects on the volume and variability of trade flows. Journal of International Money and Finance, 21(4), 481-496.

Bernanke, B. S. (1983). Irreversibility, uncertainty, and cyclical investment. The Quarterly Journal of Economics, 98(1), 85-106. doi:10.2307/1885568

Binding, G., & Dibiasi, A. (2017). Exchange rate uncertainty and firm investment plans evidence from swiss survey data. Journal of Macroeconomics, 51(1), 1-27. doi:10.1016/j.jmacro.2016.11.004

Bleaney, M., & Francisco, M. (2007). Exchange rate regimes, inflation and growth in developing countries - An assessment. The B. E. Journal of Macroeconomics, 7(1), 1-20.

Bloom, N. (2009). The impact of uncertainty shocks. Econometrica, 77(3), 623-685. doi:10.3982/ECTA6248

Broda, C. (2004). Terms of trade and exchange rate regimes in developing countries. Journal of International Economics, 63(1), 31-58.

Caballero, R. J., & Corbo, V. (1989). The effect of real exchange rate uncertainty on exports: Empirical evidence. The World Bank Economic Review, 3(2), 263-278. doi:10.1093/wber/3.2.263

Caldara, D., Iacoviello, M., Molligo, P., Prestipino, A., & Raffo, A. (2020). The economic effects of trade policy uncertainty. Journal of Monetary Economics, 109(1), 38-59.

Caporale, M. G., Ali, F. M., Spagnolo, F., & Spagnolo, N. (2017). International portfolio flows and exchange rate volatility in emerging Asian markets. Journal of International Money and Finance, 76, 1-15. doi:10.1016/j.jimonfin.2017.03.002

Carter, C. K., & Kohn, R. (1994). On gibbs sampling for state space models. Biometrika, 81(3), 541-53. doi:10.2307/2337125

Darby, J., Hallett, A. H., Ireland, J., & Piscitelli, L. (1999). The impact of exchange rate uncertainty on the level of investment. The Economic Journal, 109(454), 55-67. doi:10.1111/1468-0297.00416

De Grauwe, P., & Schnabl, G. (2008). Exchange rate stability, inflation, and growth in (South) Eastern and Central Europe. Review of Development Economics, 12(3), 530-49.

Demir, F. (2010). Exchange rate volatility and employment growth in developing countries: Evidence from Turkey. World Development, 38(8), 1127-1140. doi:10.1016/j.worlddev.2009.12.019

di Giovanni, J., & Shambaugh, J. C. (2008). The impact of foreign interest rates on the economy: The role of the exchange rate regime. Journal of International Economics, 74(2), 341-361. doi:10.1016/j.jinteco.2007.09.002

Dubas, J. M., Lee, B. J., & Mark. N. C. (2005). Effective exchange rate classifications and growth. Massachusetts, MA: National Bureau of Economic Research, Inc.

Edwards, S., & Yeyati, E. L. (2005). Flexible exchange rates as shock absorbers. European Economic Review, 49(8), 2079-2105.

Feldmann, H. (2011). The unemployment effect of exchange rate volatility in industrial countries. Economics Letters, 111(3), 268-271. doi:10.1016/j.econlet.2011.01.003

Fernández-Villaverde, J., Guerrón-Quintana, P., Rubio-Ramírez, J. F., & Uribe, M. (2011). Risk matters: The real effects of volatility shocks. American Economic Review, 101(6), 2530-2561. doi:10.1257/aer.101.6.2530

Fidora, M., Fratzscher, M., & Thimann, C. (2007). Home bias in global bond and equity markets: The role of real exchange rate volatility. Journal of International Money and Finance, 26(4), 631-655. doi:10.1016/j.jimonfin.2007.03.002

Görg, H., & Wakelin, K. (2002). The impact of exchange rate volatility on US direct investment. The Manchester School, 70(3), 380-397. doi:10.1111/1467-9957.00308

Husain, M. A., Mody, A., & Rogoff, K. S. (2005). Exchange rate regime durability and performance in developing versus advanced economies. Journal of Monetary Economics, 52(1), 35-64. doi:10.1016/j.jmoneco.2004.07.001

Husted, L., Rogers, J., & Sun, B. (2019). Monetary policy uncertainty. Journal of Monetary Economics, 115(7), 20-36. doi:10.1016/j.jmoneco.2019.07.009

Iyke, B. N., & Ho, S. Y. (2020). Consumption and exchange rate uncertainty: Evidence from selected Asian countries. The World Economy, 43(9), 2437-2462. doi:10.1111/twec.12900

Jurado, K., Ludvigson, S. C., & Ng, S. (2015). Measuring uncertainty. American Economic Review, 105(3), 1177-1216. doi:10.1257/aer.20131193

Kiyota, K., & Urata, S. (2004). Exchange rate, exchange rate volatility and foreign direct investment. The World Economy, 27(10), 1501-1536. doi:10.1111/j.1467-9701.2004.00664.x

Levy-Yeyati, E., & Sturzenegger, F. (2003). To float or to fix: Evidence on the impact of exchange rate regimes on growth. American Economic Review, 93(4), 1173-1193. doi:10.1257/000282803769206250

Mohaddes, K., & Raissi, M. (2020). Global VAR (GVAR) Database, 1979Q2-2019Q4. Retrieved April 04, 2023, from https://doi.org/10.17863/CAM.56726

Mumtaz, H., & Surico, P. (2018). Policy uncertainty and aggregate fluctuations. Journal of Applied Econometrics, 33(3), 319-331. doi:10.1002/jae.2613

Mumtaz, H., & Theodoridis., K. (2020). Dynamic effects of monetary policy shocks on macroeconomic volatility. Journal of Monetary Economics, 114(6), 262-282. doi:10.1016/j.jmoneco.2019.03.011

Mumtaz, H., & Zanetti, F. (2013). The impact of the volatility of monetary policy shocks. Journal of Money, Credit and Banking, 45(4), 535-558. doi:10.1111/jmcb.12015

Nordstrom, A., Roger, M. S., Stone, M. M. R., Shimizu, S., Kisinbay, T., & Restrepo, J. (2009). The role of the exchange rate in inflation-targeting emerging economies: Targeting emerging economies. Washington, D.C.: International Monetary Fund.

Obstfeld, M., & Rogoff, K. S. (1998). Risk and exchange rates. Cambridge, MA: National Bureau of Economic Research.

Ozturk, E. O., & Sheng, X. S. (2018). Measuring global and country-specific uncertainty. Journal of International Money and Finance, 88(8), 276-295. doi:10.1016/j.jimonfin.2017.07.014

Perée, E., & Steinherr, A. (1989). Exchange rate uncertainty and foreign trade. European Economic Review, 33(6), 1241-1264. doi:10.1016/0014-2921(89)90095-0

Rahman, S., & Serletis, A. (2009). The effects of exchange rate uncertainty on exports. Journal of Macroeconomics, 31(3), 500-507. doi:10.1016/j.jmacro.2008.12.005

Rose, A. K. (2011). Exchange rate regimes in the modern era: Fixed, floating, and flaky. Journal of Economic Literature, 49(3), 652-672.

Servén, L. (2003). Real-exchange-rate uncertainty and private investment in LDCS. The Review of Economics and Statistics, 85(1), 212-218.

Sugiharti, L., Esquivias, M. A., & Setyorani, B. (2020). The impact of exchange rate volatility on Indonesia’s top exports to the five main export markets. Heliyon, 6(1), Article e03141. doi:10.1016/j.heliyon.2019.e03141

Tavlas, G., Dellas, H., & Stockman, A. C. (2008). The classification and performance of alternative exchange-rate systems. European Economic Review, 52(6), 941-963. doi:10.1016/j.euroecorev.2008.02.003

DOI: https://doi.org/10.46223/HCMCOUJS.econ.en.14.1.2729.2024

14(1)2024

Exchange rate uncertainty and economic fluctuations in typical emerging economies