THE DETERMINANTS OF EXCHANGE RATE VOLATILITY IN THE MENA REGION: NEW EVIDENCE USING A DYNAMIC PANEL DATA

Abstract

This research investigates the factors shaping exchange rate fluctuations across 20 MENA economies over the period spanning Q1 1990 to Q4 2022. Exchange rate variability is initially quantified through a GARCH specification, while both short-term and long-term dynamics are evaluated using the Mean Group (MG) and Pooled Mean Group (PMG) estimation techniques. Empirical findings indicate that, for the overall sample, the interest rate differential, foreign direct investment (FDI), and economic expansion contribute to dampening exchange rate instability, whereas rising oil prices intensify it. Within oil-exporting economies, stronger institutional quality is associated with reduced volatility, while increases in oil prices and heightened political uncertainty amplify fluctuations. In contrast, for non-oil-exporting economies, economic growth and oil price increases exert upward pressure on exchange rate volatility, whereas the inflation differential plays a stabilising role, highlighting pronounced structural heterogeneity between the two groups. Accordingly, policy implications suggest that oil-exporting economies should pursue economic diversification alongside improvements in institutional quality. Conversely, non-oil-exporting economies should focus on strengthening political stability, advancing governance reforms, and maintaining credible monetary policy frameworks to ensure long-term exchange rate stability.