Macroeconomic fundamentals and exchange rates in South Asian economies

Abstract

Purpose This study aims to examine the impact of macroeconomic fundamentals on exchange rates of selected South Asian economies during 1981-2013. Design/methodology/approach The authors have used two econometric approaches to the data. For the pooled sample, estimated generalized least square (EGLS) and the two-stage least square method are applied. For the panel data, the authors have used the panel generalized method of moments and ordinary least squares (OLS) methods. Findings The results suggest that macroeconomic factors have a significant impact on exchange rates. The robust findings highlight that improvements in domestic economic and political systems are crucial for a successful exchange rate policy. Originality/value The existing literature on exchange rate fundamentals have either focused on exchange rates and international trade or investigated the relationship for the developed economies. Covering a period of more than three decades, and using both pooled and panel estimations, our study is unique in terms of its focus on the South Asian economies.