Exchange Rates in Emerging Markets in the First Wave of the Covid-19 Pandemic

ABSTRACT

We analyze the impact of the Covid-19 pandemic on emerging market real exchange rates using a Behavioral Equilibrium Exchange Rate approach augmented by pandemic variables. We show that behavioral factors related to Covid-19 played a significant role in explaining the behavior of emerging market real exchange rates during the first wave of the pandemic. The real exchange rates were driven by the number of new Covid-19 deaths rather than by the number of new infections. These results are robust for different country samples.

KEYWORDS:

• Emerging markets
• behavioral equilibrium exchange rates
• pandemic effects
• Covid-19
• PMGE

JEL CLASSIFICATION:

• F31
• O11
• C23
• I15

Disclosure Statement

No potential conflict of interest was reported by the author(s).

 

We benefited from comments and suggestions made by Carolina Rachel, Caroline Canzler, Fabian Reck, Svatopluk Kapounek, Jesús Crespo Cuaresma, Povilas Lastauskas, Rima Rubčinskaitė and other participants of the conference ECOS2021 at the Mendel University Brno. Jarko Fidrmuc appreciates funding from the European Social Fund (project No 09.3.3-LMT-K-712-01-123) under a grant agreement with the Research Council of Lithuania (LMTLT).

Supplementary Material

Supplemental data for this article can be accessed online at https://doi.org/10.1080/00128775.2022.2074461

Notes

¹ See for instance Lothian and Taylor (2008), or Morvillier et al. (2020).

² McKibbin et al. (2006) suggest that in a pandemic, capital flows from the more to the less affected economies. This would usually imply exchange rate changes in favor of the less affected.

³ Greece is removed because it holds the euro as its currency. Russia is excluded due to the Russian ruble’s strong dependence on crude oil prices (Alekhin 2016; Dreger et al. 2016). Argentina is eliminated for data availability reasons and because of the turmoil surrounding the Argentinian peso in the years leading up to 2020 (Castillo-Ponce and Lai 2020). Egypt is discarded because it changed its exchange rate regime in 2016 (El Baradei 2019). Further, the economies of Pakistan, Peru and Taiwan are cleared from our dataset due to data availability reasons. Lastly, we remove countries whose central banks pursue fixed exchange rate regimes (Qatar, Saudi Arabia and the United Arab Emirates).

⁴ Non-linear estimation results are available upon request.

Additional information

Funding

This work was supported by the European Social Fund under a grant agreement with the Research Council of Lithuania (LMTLT) [project No 09.3.3-LMT-K-712-01-123].

Notes on contributors

Leon Kohrt

Leon Kohrt is a graduate student at the Faculty of Economics, University of Cambridge, and a research associate at the Zeppelin University Friedrichshafen, Germany. His main research interests are international finance, inflation expectations, and political economy.

Florian Horky

Florian Horky is a Ph.D. student at the Zeppelin University Friedrichshafen. His research focus covers especially international finance, capital markets, and behavioral economics.

Jarko Fidrmuc

Prof. Jarko Fidrmuc is a professor of international and digital economics at the Zeppelin University Friedrichshafen, Germany and a research fellow at the Vilnius University, Lithuania, and Mendel University in Brno, Czech Republic. His current research concentrates on international macroeconomics and finance and globalization with a focus on Eastern European Countries and China.