This study investigates the relationships between
exchange rate volatility and governance indicators for emerging economies.
Government effectiveness and regulatory quality as main indicators of
governance are analyzed in terms of their implications for exchange rate
volatility for a selected group of emerging countries consisting of Argentina,
Mexico, South Africa and Turkey covering the period from 1996 to 2022.
Government effectiveness indicator captures perceptions of the quality of
public services, the quality of policy formation and implementation, the
credibility of the government’s commitment to designed policies, the quality of
the civil service and the degree of its independence from political pressures.
Regulatory quality indicator measures perceptions of the ability of the
government to formulate and implement sound policies and regulations that allow
and promote private sector development. It is shown that countries with higher
degrees of government effectiveness exhibit lower exchange rate volatility. In
addition, higher levels of regulatory quality turn out to be associated with
lower exchange rate volatility. These findings yield significant policy
implications for emerging countries that experience high exchange rate
volatility, which constitutes the major contribution of this study to the
literature.
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