Abstract
This paper aims to present a theoretical framework regarding the determinants of Moroccan Real Effective Exchange Rate (REER) volatility and to define the influential factors affecting it for the Moroccan economy between 1980 and 2020. This objective is primarily motivated by the recent changes adopted by Moroccan authorities towards a flexible exchange rate regime, which includes a progressive widening of the fluctuation range of the exchange rate. In this study, we used a GARCH(1,1) model and applied an Error Correction Model (ECM) with an estimation of the Autoregressive Distributed Lag (ARDL) approach. We found strong evidence that, in the long run, foreign direct investments, commercial openness, and terms of trade have a statistically significant negative impact on the volatility of the Moroccan REER, while the latter has a positive influence. Additionally, external debt, public expenditure, and the applied exchange rate regime positively affect REER volatility; in other words, they contribute to increased volatility in the foreign exchange market and the Moroccan economy. Conversely, the money supply has a negative impact, and the inflation rate has a positive effect on the studied volatility; however, these last results are not statistically significant.
Keywords. Real Effective Exchange Rate; Exchange Rate Volatility; GARCH Model; Error Correction Model; ARDL; Monetary Policy.
JEL. F31, F41, C22, C53, E52, C32.
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