The impact of the US interest rate on the exchange rate of the emerging countries: A cross-country empirical study

Abstract

The aim of the research is to examine the influence of US interest rate changes on the nominal and real effective exchange rates of 20 emerging economies. To achieve this, a cross-country empirical study utilizing historical macroeconomic data was conducted, with data collected and analyzed from sources such as the Federal Reserve Economic Data (FRED), World Bank Data, and IMF, spanning from 2003 to 2022. Several statistical tools are used for data analysis, including descriptive statistics, inferential statistics, regression analysis and hypothesis testing. These tools help researchers summarize data, draw conclusions and assess the significance of relationships between variables. The findings specify that the US interest rate generally exhibits a positive and statistically significant relationship with the nominal exchange rate across all regions, signifying that an increase in US interest rates is associated with a depreciation of the nominal exchange rate in these economies. For the real effective exchange rate, a significant positive relationship was observed, particularly in Asia, linking rising US rates to currency appreciation. Additionally, the inflation rate consistently showed a significant negative effect on the nominal exchange rate, while other macroeconomic factors like domestic interest rates, foreign direct investment, external debt, trade openness, and economic growth presented varied effects across regions. These results suggest that US monetary policy applies substantial spillover effects on emerging economies through various channels, and that domestic macroeconomic conditions also play a crucial role in shaping exchange rate dynamics. Finally, this research underwrites to a deeper understanding of how different emerging markets respond to external shocks under varying economic cycles, offering critical insights for policymakers, investors, and stakeholders navigating the complexities of the global economy.