Determinants of exchange rates in relation to macroeconomic factors: An econometric study of selected countries

Exchange rates have long been a subject of curiosity across economies and have been extensively studied in academic research. Understanding the relationship between exchange rates and other macroeconomic variables is crucial for ensuring economic stability and for enabling policymakers to design appropriate responses in times of crisis. The aim of this study is to theoretically and empirically examine the relationship between exchange rates and selected macroeconomic variables—namely interest rates, inflation, income, and money supply—within the frameworks of Purchasing Power Parity (PPP), Interest Rate Parity (IRP), and the Monetarist Approach. The study covers the period from January 2003 to December 2023 and focuses on six developing countries (Brazil, Mexico, South Africa, Turkey, Hungary, and Romania) that experienced inflation rates above the global average during this period. The empirical analyses reveal that, in the long run, interest rates, inflation, and money supply exert a statistically significant positive impact on exchange rates. In the short run, these three variables continue to have a positive and significant effect on exchange rates. However, changes in income do not appear to influence exchange rates in either the short or long run. Based on these findings, it can be concluded that while the Purchasing Power Parity and Monetarist Approach hold in explaining exchange rate movements, the Interest Rate Parity theory does not appear to be valid in this context.