Analysis of the dynamic and causal relationship between exchange rate and selected macroeconomic variables in Somalia: ARDL and Toda-Yamamoto methodologies

The main target of this study is to analyze the long and short-run interaction between the exchange rate and the selected macroeconomic indicators like the gross domestic product, inflation rates, domestic investment, government spending, and the trade openness in Somalia. The study covers 50 years ranging from 1970 to 2019 and applied various econometric techniques to estimate the dynamic and the causal relationship between the said variables. At the outset, to avoid being encountered in the problem of spurious regression, it has been tested the presence of a unit root in the series using augmented Dickey-Fuller and the Phillips-Perron unit root tests. After that, the autoregressive distributed lag models (ARDL) specified the autoregressive distributed lag models and then followed by testing the causality using Toda-Yamamoto techniques. As the ARDL bound findings depict, there's a long-run relationship among the analyzed series. The findings found a positive relationship between exchange rate and economic growth. Likewise, the trade openness variable has been ascertained that it has a positive relationship with exchange rates. A negative relationship has been observed between the exchange and inflation rate. Similarly, according to the results of the ARDL, the same nexus is found between domestic investment and the exchange rate. The government expenditure variable was found to have a mixed impact on the exchange rate. Notably, the study revealed the negative impact of the civil war, as it's likely to cause the exchange rates to depreciate against the US dollar.