Effects of Exchange Rate Fluctuations on the Macroeconomics: Theoretical Framework and Literature Review

Abstract

This article presents the concepts and the theory of basic exchange rate determination, as well as the impact assessment of exchange rate volatility or the depreciation and appreciation of the baht currency at macro level. The analysis focuses on assessing the impact on key macroeconomic indices namely economic growth, trade balance, balance of payment, foreign direct investment, conducted through literature review relevant publications, articles and research reports published aboard, as well as various related foreign literatures on conclusions and recommendations that may be useful for the initial formulation of Thailand's macroeconomic management policy. The study results reveal that the exchange rates of developing countries are fluctuating as a result of the transition to a managed floating exchange rate system in which the external factors have a greater influence on the change in exchange rate levels. Exchange rate fluctuations affect economic growth, international trade and investment. The degree of impact depends on the economic structure and the taste of public consumption. The government can reduce the impact by adopting appropriate monetary policies and the development of value-added export products, and encouraging exporters to use international financial instruments to mitigate exchange rate risks.