A panel data analysis of effects of economic vulnerability index indicators on real effective exchange rate in developing countries

The volatility of exchange rates is considered to be an important measure of a country's economic vulnerability and has a direct or indirect causal relationship with a large number of macroeconomic variables. The aim of this study is to analyze the macroeconomic variables in the economic vulnerability index that affect the exchange rate for developing countries and the extent to which they affect the exchange rate, and to make policy recommendations. We conducted a panel data analysis using data from 11 developing countries between 2000 and 2022 for this purpose. We performed the analyses using the Augmented Mean Group (AMG) estimator. As a result of the analyses, it is found that there is a negative and statistically significant relationship between the real effective exchange rate and inflation, private sector credit debt/GDP and gross public debt/GDP ratio. In addition, the relationship between Real effective exchange rate and current account deficit/GDP ratio, External debt/GDP ratio and growth rate is positive and statistically insignificant. As a policy recommendation, it can be said that for stable and sustainable economic management in developing countries, the exchange rate level should be less volatile and should be compatible with reliable fiscal and monetary policies.