Macroeconomic Fundamentals and the Exchange Rate Volatility: Empirical Evidence From Somalia

Abstract

The purpose of this research is to investigate the effect of macroeconomic factors on the volatility of Somalia’s unregulated exchange rates. While utilizing the EGARCH (exponential generalized autoregressive conditional heteroskedastic) model, this study found that the unregulated exchange rate volatility of Somalia is influenced by its own shocks and the macroeconomic factors. This study implies that although Somali shilling circulated without regulatory authority for the period of the statelessness, this circulation has been accompanied by volatile exchange rates. This phenomenon makes this study an appealing work that should be pursued further. Hence, this study contributes notably to the process of reforming the exchange rate system and the monetary policy of the post-conflict economy of Somalia. In addition, the results of this study imply that even in times of war and lawlessness the laws of economics do not change completely.