Impact of Macroeconomic Fundamentals on Exchange Rates: Empirical Evidence from Developing Asian Countries

Abstract

The existing literature on exchange rate fundamentals have either focused on the relationship between exchange rates and international trade or investigated the association between exchange rates and economic fundamentals for the developed countries. This study examines the impact of macroeconomic fundamentals on exchange rates of developing Asian countries. Two econometric approaches are applied to the pool and the panel data. For the pool sample, EGLS and the two-stage Least Square Method are applied. For the panel data, we have used the panel GMM and the OLS methods. Both approaches suggest that macroeconomic factors have a significant impact on exchange rates. Several specifications and estimation techniques confirm that our findings are robust. Furthermore, we have found that improvements in domestic economic and political systems are necessary for a successful exchange rate policy. Our study is unique as it focuses on the developing Asian countries, covers a period of more than three decades, and uses both pool and panel estimations.

Keywords: Asia, Developing Countries, Exchange Rates, Macroeconomic Fundamentals

JEL Classification: C33, F31, O53