The effect of economic vulnerability index on exchange rate: A study on developing countries

The purpose of this study, which examines economic vulnerability for emerging markets, is to determine which indicators determine the economic vulnerability and to analyze whether it is vulnerable according to these indicators. With this purpose, for the period of 1994-2017, to detect the factors affecting exchange rates of 12 Fragile developing countries, rate of the current account balance / gross domestic product (GDP), rate of the gross government debt/GDP, rate of the inflation, rate of the domestic bank credit to the private sector /GDP, rate of the external debt /exports and rate of the economic growth , variables are in the scope of the vulnerability described by FED in the monetary policy report published on February 11, 2014 the effects on exchange rate corrected by standard errors estimators by using panel regression analysis and panel VAR analysis are tested econometrically. According to the results, firstly, when the results obtained from the panel regression model random effects model is observed, it is seen that rate of current account balance / gross domestic product (GDP), rate of the gross government debt/GDP, and increases in rate of the external debt /exports negatively affect the real exchange rate. On the other hand, the increase in the rate of the domestic bank credit to the private sector /GDP has a positive effect on the real exchange rate. Rate of inflation does not have a significant effect on real effective exchange rate. According to Panel VAR model results, real effective exchange rate reacts negatively to a standard deviation shock that occurs in rate of the gross government debt/GDP. Similarly, shocks in the rate of the external debt /exports also cause the real exchange rate to decline. On the other hand, the rate of economic growth, the rate of inflation, rate of the current account balance / gross domestic product (GDP) and shocks in the rate of the domestic bank credit to the private sector /GDP do not make a significant reaction to the real exchange rate.