Abstract
This paper studies the impact of macroeconomic factors on co-movement in the foreign exchange rate markets. Data of foreign exchange rates from 24 merging markets is used to this end along with a dynamic spatial Durbin model as to examine spatial dependencies among markets. Our empirical findings show no evidence that cultural ties exert a role in spreading macroeconomic shocks in the exchange rate of a country to the exchange rates of other countries. Moreover, we show that economic closeness through foreign direct investment (FDI) and international bilateral trade is the most prominent channel in spreading macroeconomic shocks and spatial effects in emerging markets through the foreign exchange rates. In addition, geographical proximity reinforces the interdependence relationship of emerging markets. Our findings show that the co-movement of foreign exchange rate markets across the selected emerging markets is positively influenced by their gross domestic product (GDP) and interest rate differential and negatively affected by the terms of trade and remittance. In addition, we reveal that terms of trade, the inflation differential, and remittance are the most prominent fundamental factors affecting foreign exchange rate movements.
Original language | English |
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Pages (from-to) | 979-1011 |
Number of pages | 33 |
Journal | Empirical Economics |
Volume | 66 |
Issue number | 3 |
DOIs | |
Publication status | Published - Mar 2024 |
Keywords
- C23
- C33
- Co-movement
- E44
- Emerging markets
- F31
- Foreign exchange rates
- Macroeconomic fundamentals
- Spatial dependence
- Spatial panel
ASJC Scopus subject areas
- Economics and Econometrics
- Mathematics (miscellaneous)
- Statistics and Probability
- Social Sciences (miscellaneous)