Macroeconomic factors of exchange rate volatility: Evidence from four neighbouring ASEAN economies

Abstract

Purpose

The purpose of this study is to examine the factors of exchange rate volatility from the macroeconomic perspective for four neighbouring ASEAN economies.

Design/methodology/approach

This study has scrutinised the link between macroeconomic factors and exchange rate volatility in both the short and the long run by applying econometrics techniques.

Findings

This study further suggests the link between macroeconomic factors and exchange rate volatility in both the short and the long run for the selected economies. The empirical results, however, indicate that a set of common factors seems to influence the exchange rate volatility, whereby the stock market is a great influence commonly found across countries. The Indonesian rupiah seems to be the most sensitive to the innovations in macroeconomic factors, while the Singapore dollar is the least.

Research limitations/implications

The macroeconomic factors are believed to be the forces behind exchange rate volatility through the presumable rigidities of their exchange rates, resulting from the managed float exchange rate system adopted by those countries. Their capital markets are vital in maintaining exchange rate stability, hence suggesting the imperative role of respective authorities and market players in managing a viable capital market.

Originality/value

Little attention has been given to developing countries' experiment with their exchange rate systems due to their presumed rigid volatility. This study adopts a more sophisticated approach in measuring the volatility of the exchange rate and examines the underlying factors of exchange rate volatility instead of the level of exchange rate.

Citation

Lee‐Lee, C. and Hui‐Boon, T. (2007), "Macroeconomic factors of exchange rate volatility: Evidence from four neighbouring ASEAN economies", Studies in Economics and Finance, Vol. 24 No. 4, pp. 266-285. https://doi.org/10.1108/10867370710831828