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

doi:10.1016/j.ecosys.2019.100696

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

Department of Economics

Research output: Contribution to journal › Article › peer-review

8 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 language	English
Article number	100696
Pages (from-to)	1-14
Number of pages	14
Journal	Economic Systems
Volume	43
Issue number	2
DOIs	https://doi.org/10.1016/j.ecosys.2019.100696
Publication status	Published - Jun 2019

Keywords

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

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10.1016/j.ecosys.2019.100696

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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.",

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N2 - 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.

AB - 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.

KW - Chinese slowdown

KW - Dynamic factor model

KW - Emerging economy

KW - Exchange rate

KW - US monetary policy

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ER -

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

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Keywords

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