Examining the relationship between macroeconomic fundamentals and exchange rates: Evidence from the Common Monetary Area (CMA)
type: CreativeWork
description: This study investigated the relationship between macroeconomic fundamentals and exchange rates in the Common Monetary Area (CMA) using the Pooled Mean Group (PMG) methodology within a Panel Autoregressive Distributed Lag (PARDL) framework, accounting for structural breaks. Utilising panel data from 1991 to 2022, the study first applied Fisher-type Augmented Dickey-Fuller (ADF) and Phillips-Perron (PP) tests to determine the integration orders of variables, which were found to be a mix of I(0) and I(1). This mixed integration justified the PARDL approach. The findings revealed that the relative money supply significantly affects the exchange rate in both the long and short runs, with increases in money supply leading to currency depreciation. Thus, the overarching relationship between macroeconomic fundamentals and exchange rates in the CMA indicates a complex interaction where monetary supply significantly influences currency values in both the long and short run, albeit with varying magnitudes. The negative impact of increased money supply on the exchange rate necessitates vigilant monetary policy to prevent undue depreciation and associated economic vulnerabilities. However, the study found that interest rates and GDP growth had a neutral impact on exchange rate fluctuations, which suggests that these variables, under current economic conditions, may have a muted direct effect on exchange rate fluctuations, possibly due to integrated economic policies or external economic shocks that overshadow domestic policy impacts. The Granger causality results reveled significant causality from relative money supply and inflation to the nominal exchange rate showed the predictive power of these macroeconomic fundamentals on exchange rate fluctuations. The study recommends that central banks maintain stringent controls over the money supply to mitigate abrupt exchange rate fluctuations. Monetary policies should be carefully calibrated to manage inflation levels that could lead…
abstract: This study investigated the relationship between macroeconomic fundamentals and exchange rates in the Common Monetary Area (CMA) using the Pooled Mean Group (PMG) methodology within a Panel Autoregressive Distributed Lag (PARDL) framework, accounting for structural breaks. Utilising panel data from 1991 to 2022, the study first applied Fisher-type Augmented Dickey-Fuller (ADF) and Phillips-Perron (PP) tests to determine the integration orders of variables, which were found to be a mix of I(0) and I(1). This mixed integration justified the PARDL approach. The findings revealed that the relative money supply significantly affects the exchange rate in both the long and short runs, with increases in money supply leading to currency depreciation. Thus, the overarching relationship between macroeconomic fundamentals and exchange rates in the CMA indicates a complex interaction where monetary supply significantly influences currency values in both the long and short run, albeit with varying magnitudes. The negative impact of increased money supply on the exchange rate necessitates vigilant monetary policy to prevent undue depreciation and associated economic vulnerabilities. However, the study found that interest rates and GDP growth had a neutral impact on exchange rate fluctuations, which suggests that these variables, under current economic conditions, may have a muted direct effect on exchange rate fluctuations, possibly due to integrated economic policies or external economic shocks that overshadow domestic policy impacts. The Granger causality results reveled significant causality from relative money supply and inflation to the nominal exchange rate showed the predictive power of these macroeconomic fundamentals on exchange rate fluctuations. The study recommends that central banks maintain stringent controls over the money supply to mitigate abrupt exchange rate fluctuations. Monetary policies should be carefully calibrated to manage inflation levels that could lead…
author: Kharon, Melvilino Lesley
language: en
keywords: Panel autoregressive distributed lag, Structural breaks, Granger causality, CMA, Namibia, University of Namibia
date published: 2025
date modified: 2026-07-27T20:22:12Z
provider: University of Namibia
publisher: Networked Digital Library of Theses and Dissertations
type: WebPage
source organization: University of Namibia

PropertyValue
property ID: Handle
value: http://hdl.handle.net/11070/4146