Document de Travail n° 2016/03 - Are exchange rates driven by global or local factors?

This working paper is the sole responsibility of the author. It is circulated in order to stimulate debate and to encourage comments and criticism.

This paper uses factor analysis to present an original explanation of floating exchange rate movements. I estimate the shares of domestic and external drivers of these evolutions and find that external common factors are the main drivers of exchange rates and that there is a common pattern for both advanced and emerging countries. These results are robust in time and across countries according to multiple robustness checks. I also provide economic interpretations of the underlying factors. If traditional drivers are found (US relative economic situation, commodity prices), I also find a selective perception of risk aversion between advanced and emerging economies. This work falls within the literature on monetary conditions (more precisely Mundell’s trilemma). The study covers 26 countries, and I detail how results vary between emerging and advanced economies.