Abstract
The purpose of this research is to investigate the effect of macroeconomic factors on the volatility of Somalia’s unregulated exchange rates. While utilizing the EGARCH (exponential generalized autoregressive conditional heteroskedastic) model, this study found that the unregulated exchange rate volatility of Somalia is influenced by its own shocks and the macroeconomic factors. This study implies that although Somali shilling circulated without regulatory authority for the period of the statelessness, this circulation has been accompanied by volatile exchange rates. This phenomenon makes this study an appealing work that should be pursued further. Hence, this study contributes notably to the process of reforming the exchange rate system and the monetary policy of the post-conflict economy of Somalia. In addition, the results of this study imply that even in times of war and lawlessness the laws of economics do not change completely.
Highlights
Exchange rate behavior is important for the people of each country as the exchange rate volatility has a direct effect on the prices of basic commodities (Nor, 2015)
The aim of this study is to examine the volatility of Somali informal exchange rates systematically
The study investigates whether macroeconomic fundamentals have a significant effect on the volatility of the informal exchange rates in Somalia
Summary
Exchange rate behavior is important for the people of each country as the exchange rate volatility has a direct effect on the prices of basic commodities (Nor, 2015). In the context of emerging market economies, countries are facing continuing challenges in handling boom–bust capital flow cycles as these capital flows have increasingly become volatile. Such situation creates dislocation during the bust and puts upward pressures on currencies during the boom (Ostry, 2016). To identify a common policy direction for such disastrous events, numerous studies have analyzed exchange rate volatility of the developing countries (Chit et al, 2010; De Gregorio et al, 2000; Devereux & Lane, 2003; Edison & Reinhart, 2001; Glick & Hutchison, 2005). Notwithstanding the enormous attempts put in examining the volatility of exchange rates, the findings of Meese and Rogoff (1983) are still integral, which suggest that movements in exchange rates are primarily unpredictable (Devereux & Lane, 2003)
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