Influence of Macroeconomic Variables on Exchange Rates

Abstract

Exchange rates play a significant role in international trade not only in fixing the prices but also in determining the nature of hedging to be arranged to avoid exchange rate risks. In this article we used three countries yearly exchange rates with their macroeconomic variables such as relative interest rates etc to study the impact they exert on exchange rates. We used bootstrapping technique to increase the sample size to run regression to study the effect. The previous researchers used general regression models to establish relationships but we have applied multi models by linking complementary variables to identify the best model. Our results showed that model B was robust which indicated all macroeconomic variables significantly influenced the exchange rates except employment and budget deficit. Most of the macroeconomic variables showed opposite sign contrary to the expectations and we concluded that the psychological factors like investor confidence dominate over economic variables in deciding exchange rate fluctuation.