Title:
Does Monetary Policy Efficiency Stabilise Exchange Rates? Evidence From Developing Economies

Authors:
Cep Jandi Anwar*, Shindi Oktavia, Indonesia

Abstract:

Exchange rate volatility is one of the major issues faced by developing economies, as exchange rate fluctuations often affect their macroeconomic stability. However, most of the literature has focused on the impact of individual monetary policy instruments on exchange rate volatility. Limited studies have been placed on the impact of monetary policy efficiency on exchange rate volatility. This paper aims to analyze the impact of monetary policy efficiency on exchange rate volatility in 48 developing economies from 2011 to 2023. A dynamic panel data analysis using the System Generalized Method of Moments (System GMM) is conducted to incorporate exchange rate volatility persistence and endogeneity. According to this analysis, exchange rate volatility is highly persistent, but monetary policy efficiency significantly reduces exchange rate volatility. However, inflation, money supply, and international trade exposure are factors that increase exchange rate volatility. On the other hand, exchange rate volatility is not significantly influenced by the central policy rate.

DOI: https://doi.org/10.51505/IJEBMR.2026.10319