Exchange rate determination: A GMM approach to social-economic and governance factors.

Abstract

This study examines exchange rate determinants, drawing on Balassa (1964)'s critique of productivity oversight and guided by Gelb and Diofas (2016)'s framework, using the Big Mac Index as a proxy for purchasing power parity (PPP). Analysing data from 52 economies (2011-2019) with a dynamic Generalized Method of Moments (GMM) estimator, it reveals that exchange rates are inversely associated with trade deficits, effective governance, and inflation, while positively correlating with income, economic size, and population density. These findings emphasise the complex interplay of various factors influencing exchange rates, providing policymakers and financial stakeholders with invaluable insights.