An Empiric Analysis on The Relationship Between Exchange Rates and Inflation in Fragile Five Countries

Year 2023, Volume: 18 Issue: 70, 237 - 251, 11.05.2023

Murat Emikönel , Ayhan Orhan

Abstract

Exchange rates, which are defined as the value of a local currency against foreign currency, are one of the important factors affecting the economic structure of a country and determining inflationary trends in open economies. Following the FED's expansionary monetary policy after the 2008 crisis, the contractionary monetary policy in 2013 caused the currencies of developing countries to depreciate against the US dollar. Morgan Stanley described the five most depreciating countries as the fragile five. In this context, in this study, it is aimed to investigate the relationship between exchange rate and inflation for countries that are more affected by shocks and described as the fragile five, using ARDL bounds test. In the research, monthly data of 1990: M1-2020: M12 were used. According to the results of the analysis, it has been determined that there is cointegration between the exchange rate and the inflation rate in the countries included in the study. In the long run, it is determined that the exchange rate has no effect on inflation for Brazil, Turkey and India, and the exchange rate has an effect on the inflation rate in Indonesia and South Africa.

Keywords

Exchange Rate, Inflation, Fragile Five, ARDL Bounds Test.

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