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

Clark Liu, Ben Wang (), Huanhuan Wang and Ji Zhang

Economic Systems, 2019, vol. 43, issue 2, -

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.

Keywords: Exchange rate; Emerging economy; Dynamic factor model; US monetary policy; Chinese slowdown (search for similar items in EconPapers)
JEL-codes: F3 E52 C32 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1016/j.ecosys.2019.100696

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