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The macroeconomic effects of exchange rate movements in a commodity-exporting developing economy

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  • Doojav, Gan-Ochir
  • Purevdorj, Munkhbayar
  • Batjargal, Anand

Abstract

This paper empirically examines the macroeconomic effects of exchange rate movements and their transmission mechanisms (trade and financial channels) in Mongolia, a net debtor in foreign currency and a commodity-exporting developing economy, using Structural Bayesian Vector Autoregression (SBVAR) models. Our findings suggest that both the financial and trade channels of exchange rates are operative and have a notable impact at the macroeconomic level. We identify a significant financial channel, causing GDP contractions and affecting investments, particularly in sensitive sectors such as manufacturing and construction in response to DWER depreciation shocks. The traditional trade channel, driven by NEER depreciation, leads to increased net exports with pass-through to CPI. Despite these effects on key macro variables, exchange rate shocks do not substantially destabilize the economy. Foreign shocks, including federal funds rates, China's GDP, and copper prices, have a more pronounced impact. The trade channel plays a crucial role in the transmission of external demand and commodity price shocks, while the financial channel is essential in the transmission of commodity price shocks.

Suggested Citation

  • Doojav, Gan-Ochir & Purevdorj, Munkhbayar & Batjargal, Anand, 2024. "The macroeconomic effects of exchange rate movements in a commodity-exporting developing economy," International Economics, Elsevier, vol. 177(C).
    • Handle: RePEc:eee:inteco:v:177:y:2024:i:c:s2110701723000872
    DOI: 10.1016/j.inteco.2023.100475
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    More about this item

    Keywords

    Exchange rate; Trade channel; Financial channel; Debt-weighted exchange rate; Structural bayesian VAR; A small open commodity-exporting economy;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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