Determinants of Real Effective Exchange Rates in Emerging Market Economies

Abstract

This paper uses quarterly data to examine the effect of global and domestic factors on the real effective exchange rates (REER) for 20 emerging market economies for 2000-2015. We find that GDP growth and the domestic policy interest rate are robustly associated with REER appreciation in emerging economies. Among global factors, an increase in global risk is negatively related to the real exchange rate, while the Brent crude oil price is positively related. The overall positive effect of crude oil price is more pronounced for the REER of oil-exporting countries, and negative for oil-importing countries. We also find that a relatively flexible exchange rate regime reduces the negative impact of global risk on REER, but capital account openness does not seem to play a role. These findings have implications for emerging market economies in developing policies to respond to commodity price fluctuations and changes in the global monetary and risk environment.