Exchange Rate Regimes, Monetary Policy, Banking Soundness, and Exchange Rate Volatility in Developing Economies: Short-Run and Structural Evidence
- 1Department of Economics, College of Administration and Economics, University of Kirkuk, Kirkuk 36001, Iraq
Abstract
This study investigates the ability to account for exchange rate volatility in 25 developing economies using exchange rate regimes, broad money growth, international reserves and banking soundness. It helps to distinguish the annual variation from the persistent cross-country differences as the bank Z-score, holdings of reserves and regime orientation change more slowly than the prices of exchange markets. The short-run analysis includes 348 country-year observations and estimates pooled regression models that include year effects following second-generation unit root tests. Common shocks are dealt with by Driscoll-Kraay standard errors and the limited number of countries is dealt with by wild cluster bootstrap inference. A complementary between-country model employs country averages over 2005-2019 and captures regime orientation as the proportion of years in a fixed regime. Reserves and banking soundness measures change only in a small way in the short run. Broad money growth has a positive coefficient under Driscoll-Kraay inference, but the effect is not significant under the wild bootstrap. The flexible-regime indicator and the interaction with banking soundness also do not have a significant effect. A higher share of years under a fixed exchange rate regime is associated with lower average exchange rate volatility. The coefficient is stable when removing each country one at a time, but with the evidence only at 10 percent in the wild-bootstrap inference. In none of the dimensions is soundness of the bank an independent influence. The findings indicate that the policy on exchange rate mechanisms is more apparent as a structural determinant of monetary buffers stability than banking resilience stability and annual changes in banking resilience. The conclusions are associational rather than causal, and fixed regimes mechanically limit movements in official exchange rates.
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BibTeX
@article{rashid2026exchange,
title = {{Exchange Rate Regimes, Monetary Policy, Banking Soundness, and Exchange Rate Volatility in Developing Economies: Short-Run and Structural Evidence}},
author = {Bashar Natiq Rashid},
journal = {مجلة العلوم التجارية والبيئية},
year = {2026},
month = oct,
doi = {10.21608/jcese.2026.538570.1173},
url = {https://doi.org/10.21608/jcese.2026.538570.1173},
note = {CC BY},
}
RIS
TY - JOUR
TI - Exchange Rate Regimes, Monetary Policy, Banking Soundness, and Exchange Rate Volatility in Developing Economies: Short-Run and Structural Evidence
AU - Bashar Natiq Rashid
PY - 2026
DA - 2026/10/25
JO - مجلة العلوم التجارية والبيئية
DO - 10.21608/jcese.2026.538570.1173
UR - https://doi.org/10.21608/jcese.2026.538570.1173
AB - This study investigates the ability to account for exchange rate volatility in 25 developing economies using exchange rate regimes, broad money growth, international reserves and banking soundness. It helps to distinguish the annual variation from the persistent cross-country differences as the bank Z-score, holdings of reserves and regime orientation change more slowly than the prices of exchange markets. The short-run analysis includes 348 country-year observations and estimates pooled regression models that include year effects following second-generation unit root tests. Common shocks are dealt with by Driscoll-Kraay standard errors and the limited number of countries is dealt with by wild cluster bootstrap inference. A complementary between-country model employs country averages over 2005-2019 and captures regime orientation as the proportion of years in a fixed regime. Reserves and banking soundness measures change only in a small way in the short run. Broad money growth has a positive coefficient under Driscoll-Kraay inference, but the effect is not significant under the wild bootstrap. The flexible-regime indicator and the interaction with banking soundness also do not have a significant effect. A higher share of years under a fixed exchange rate regime is associated with lower average exchange rate volatility. The coefficient is stable when removing each country one at a time, but with the evidence only at 10 percent in the wild-bootstrap inference. In none of the dimensions is soundness of the bank an independent influence. The findings indicate that the policy on exchange rate mechanisms is more apparent as a structural determinant of monetary buffers stability than banking resilience stability and annual changes in banking resilience. The conclusions are associational rather than causal, and fixed regimes mechanically limit movements in official exchange rates.
SN - 2974-3125
SN - 2974-3117
ER -