The macroeconomic effects of exchange rate movements in a commodity-exporting developing economy

Gan-Ochir Doojav (), Munkhbayar Purevdorj and Anand Batjargal

International Economics, 2024, vol. 177, issue C

Abstract: This paper empirically examines the macroeconomic effects of exchange rate movements and their transmission mechanisms (trade and financial channels) in Mongolia, a net debtor in foreign currency and a commodity-exporting developing economy, using Structural Bayesian Vector Autoregression (SBVAR) models. Our findings suggest that both the financial and trade channels of exchange rates are operative and have a notable impact at the macroeconomic level. We identify a significant financial channel, causing GDP contractions and affecting investments, particularly in sensitive sectors such as manufacturing and construction in response to DWER depreciation shocks. The traditional trade channel, driven by NEER depreciation, leads to increased net exports with pass-through to CPI. Despite these effects on key macro variables, exchange rate shocks do not substantially destabilize the economy. Foreign shocks, including federal funds rates, China's GDP, and copper prices, have a more pronounced impact. The trade channel plays a crucial role in the transmission of external demand and commodity price shocks, while the financial channel is essential in the transmission of commodity price shocks.

Keywords: Exchange rate; Trade channel; Financial channel; Debt-weighted exchange rate; Structural bayesian VAR; A small open commodity-exporting economy (search for similar items in EconPapers)
JEL-codes: C51 F31 F41 F43 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:inteco:v:177:y:2024:i:c:s2110701723000872

DOI: 10.1016/j.inteco.2023.100475

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