Macro Determinants of the Real Exchange Rate in a Small Open Small Island Economy: Evidence from Mauritius via BMA

Njindan Iyke, Bernard (2015): Macro Determinants of the Real Exchange Rate in a Small Open Small Island Economy: Evidence from Mauritius via BMA.

Abstract

We assess the robust macro determinants of the real exchange rate in Mauritius under model uncertainty by utilizing Bayesian Model Averaging (BMA). We introduce a broader range of potential macro determinants of the real exchange rate in Mauritius. Then we tackle the issue of model uncertainty when identifying these macro determinants of the real exchange rate by exploring the impact of different priors on the model size, and different priors on model coefficients on the posterior estimates. We identify the real money supply, and the real productivity to be the robust macro determinants of the real exchange rate in Mauritius. Their coefficient signs are also theoretically consistent. The real money supply impact on the real exchange rate negatively, whereas the real productivity impact on it positively. Our results remain robust to different priors on the model size, and to different priors on model coefficients.

• Item Type: MPRA Paper
• Language: English
• Keywords: Model Uncertainty, Bayesian Model Averaging (BMA), Macro Determinants, Real Exchange Rate, Mauritius
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C11 - Bayesian Analysis: General; C - Mathematical and Quantitative Methods > C6 - Mathematical Methods ; Programming Models ; Mathematical and Simulation Modeling > C63 - Computational Techniques ; Simulation Modeling; F - International Economics > F3 - International Finance > F31 - Foreign Exchange

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