What drives fluctuations in exchange rate growth in emerging markets – A multi-level dynamic factor approach

Clark Liu, Ben Zhe Wang, Huanhuan Wang, Ji Zhang*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

2 Citations (Scopus)

Abstract

Historically, exchange rates in many emerging economies have been volatile. We use a dynamic hierarchical factor model to investigate the driving forces behind these fluctuations in exchange rate growth and find that in recent years, especially since the Great Recession, the common (world) factor has become more important. We also find that, since 2009, US monetary policy and Chinese economic growth have had much greater effects on emerging market exchange rate growth fluctuations. The historical decomposition indicates that 18.8% and 23% of the variations in the world factor after 2009 can be explained by US monetary policy shock and Chinese industrial production shock, respectively.

Original languageEnglish
Article number100696
Pages (from-to)1-14
Number of pages14
JournalEconomic Systems
Volume43
Issue number2
DOIs
Publication statusPublished - Jun 2019

Keywords

  • Chinese slowdown
  • Dynamic factor model
  • Emerging economy
  • Exchange rate
  • US monetary policy

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