Evaluating the Determinants of Exchange Rates in Emerging Markets: Evidence from Nigeria and South Africa

Abstract

This paper evaluates empirically the determinants of exchange rates in emerging markets, with emphasis on Nigeria and South Africa during the period 2001-2020. By applying the pooled OLS regression method on both panel data and countries as subsamples, the study finds out that under the panel level, inflation rate, government final consumption expenditure and broad money had a negative effect on exchange rate, and that only government final consumption expenditure effect was significant. On the other hand, real interest rate, current account balance, economic health, GDP per capita, gross capital formation, and trade had positive effects on exchange rate, but only the effects of economic health, gross domestic product per capita, and gross capital formation were significant. For Nigeria, inflation rate and GDP per capita had negative non-significant effect on exchange rate, while the economic health had a negative significant effect on exchange rate; consequently, real interest rate, current account balance, gross capital formation, trade, government final consumption expenditure, and broad money had positive non-significant effect on exchange rate. For South Africa, inflation rate, economic health, and gross capital formation had negative non-significant effect on exchange rate, meanwhile government final consumption expenditure and broad money had negative significant effect on exchange rate; in addition, real interest rate, current account balance, and trade had positive non-significant effect on exchange rate, while GDP per capita had positive significant effect on the exchange rate.