Responses of Foreign Exchange Market to External Shocks: What Makes Differences?

Hyunjoon Lim ()
Additional contact information
Hyunjoon Lim: Chonnam National University

Open Economies Review, 2025, vol. 36, issue 3, No 10, 999 pages

Abstract: Abstract This study investigates the role of external shocks on the stability of the foreign exchange(FX) market in a large panel of fifty advanced and emerging economies. I allow each country’s response of FX rate and capital inflows to vary according to institutional and economic factors through local projection methodology with country-level panel data. The results show that the negative impact of external shocks, such as US monetary policy and geopolitical risks, on the small open economies is substantial. Moreover, unanticipated US monetary tightening has a greater impact on exchange rates and capital inflows in emerging market economies compared to advanced economies. Furthermore, I test for state-dependence of the responses and discover that the effects of external shocks on the foreign exchange market are more pronounced in economies with a high sovereign debt ratio, high external debt ratio, or commodity-exporting ones. In addition, an economy with a high degree of trade openness or highly diversified exports is more likely to alleviate the negative spillovers of external shocks to the FX market.

Keywords: US Monetary policy shocks; Geopolitical risk shocks; Foreign exchange rate; Capital flows; Local projection methodology (search for similar items in EconPapers)
JEL-codes: D81 E58 F42 (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s11079-024-09785-2 Abstract (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:openec:v:36:y:2025:i:3:d:10.1007_s11079-024-09785-2

Ordering information: This journal article can be ordered from
http://www.springer. ... cs/journal/11079/PS2

DOI: 10.1007/s11079-024-09785-2

Access Statistics for this article

Open Economies Review is currently edited by G.S. Tavlas

More articles in Open Economies Review from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().