The Impact of Macroeconomic Indicators on Exchange Rates of the Visegrad Group

The chapter aims to examine a wide range of macroeconomic indicators as potential determinants of exchange rates for each currency of the Visegrad Group against US Dollars. In this context, the chapter presents two selected empirical exchange rate models and a new proposed model that explain the significance of differences between two economies and approaches used in exchange rate determination. The chapter employs multiple linear regression models on real-life data to test the relevance of these models in current economic conditions. Additionally, it analyses several macroeconomic factors and their effects on the end-month exchange rates of the Visegrad Group. The research pointed out the most significant economic indicators affecting the volatility of the analysed currencies during the period from 2004 to 2017. 2004 is the year when all the Visegrad Group countries joined the EU. The models of Frenkel–Bilson and Dornbusch–Frenkel yielded similar results for the Hungarian forint, Polish zloty and the euro, suggesting that the month-end exchange rate of these currencies depends on the changes of relative money supply, real GDP and long-term interest rates differentials. Overall, the best models were built for the Czech crown and the euro in terms of the greatest proportion of explained variance and low root mean square of error values. Finally, the research considered our proposed modified empirical exchange rate model. Its results support the relevance of economic complexity, and therefore it plays a key role in predicting exchange rate movements across the Visegrad Group.