An Empirical Analysis of the Relationship between Multiple Exchange Rate Volatilities and Macroeconomic Performance in Palestine

This paper analyzes the relationship between exchange rate fluctuations and macroeconomic performance. It is presumed that exchange rate fluctuation effects on real GDP are mainly channeled via trade through: exports and imports. The present study applies this presumption empirically to the state of Palestine, in which has no national currency, by using quarterly data from 2000:Q1 to 2014:Q4. The exchange rate is taken as the independent variable while real GDP is the dependent variable. It uses econometric tools such as: Augmented Dickey Fuller test, Ordinary Least Squares estimation, Johansen Cointegration,Granger Causality, and Impulse Response Function for exploring any relationship that my exist between the chosen variables. The major findings of this study show that: (1) while an appreciation of the Jordanian Dinar and Euro currencies in terms of Israeli Shekels improves the Palestinian economy, an appreciation of the US Dollar negatively impacts the economy by using IRFs analysis; (2) this anomalous phenomenon of asymmetric effects derived from multiple currencies in Palestine forces the economy to be vulnerable to unexpected shocks in exchange rates. Based on these findings, the Palestinian government is strongly advised to implement a national currency pegged to the exchange rate with the most and longest positive effect, which in return will help economic agents to save transaction costs, imposing less uncertainty in the local financial markets and rectify the economy on a path of greater sustained growth