Monitoring exchange rate instability in 12 selected Islamic economies

Abstract

Exchange rate instability has become a key concern within economic policy circles ever since the 1973 breakdown of Bretton Woods agreement; after 47 years, central bankers realize the deleterious effect of exchange rate on the economy in the 12 selected OIC member countries we studied. The aim of this paper is to report the findings on a proposed measure of currency instability, namely the relative volatility, to test it with data relating to 12 OIC member Muslim-majority economies using more than 28 years data. We find that relative volatility is an effective measure for tracking currency instability and exchange rate targeting could be enhanced by including policy bands as well as recommended actions for each movement outside the policy band. Further, relative volatility is significantly correlated with monetary factors suggested by strong theories that drive the exchange rate equilibrium.