Investigating the Determinants of Exchange Rate Stability : An Empirical Evidence

The major drivers of nominal and real effective exchange rates are investigated in a sample of 30 countries between 1977 and 2017. We used the multiple linear regression analysis by Fixed GLS AR1, and Pooled Mean Group (PMG). The main drivers of nominal exchange rate in the long run are found to be: broad money, interest rate, claims on central government, government final consumption expenditures, trade, inflation, GDP per capita, oil prices, school enrollment and the expected exchange rate, in the long run. While in the short run it is affected mainly by interest rate, general government final consumption expenditure, inflation, taxes, and the expected exchange rate. On the other hand, the main drivers of real effective exchange rate in the long run are found to be: current account balance, gross capital formation, trade, school enrollment, oil prices, total reserves, broad money, interest rate, claims on central government, government final consumption expenditures, GDP per capita, taxes, and the expected exchange rate. While in the short run it is only trade, unemployment rate, and the expected exchange rate