The Effects of Exchange Rates on Macroeconomic Variables: A Study of the Selected Emerging Economies

Abstract

The exchange rate channel of the monetary transmission mechanism has gained importance through widespread use of the floating exchange rate regime with increased globalization. In this context, this study aims to explore the effectiveness of the exchange rate channel on net exports and thereby total output and price level using vector auto-regression (VAR) models. The sample countries are Turkey and Argentina, which have employed a floating exchange rate regime since 22 February 2001 and 11 February 2002, respectively. The monthly data set consists of five macro-economic variables, which are short-term interest rates, the real effective exchange rate, net exports, the consumer price index, and the industrial production index for the period 2003 to 2010. The impulse-response function outcomes indicate that the operation of the exchange rate channel is effective, both in Turkey and in Argentina.