Factors influencing exchange rate volatilities: Sri Lanka compared with Ukraine

Abstract

This study investigates the determinants of exchange-rate volatility in Sri Lanka and Ukraine, focusing on macroeconomic, sociocultural, and institutional determinants. The research question is: What is the impact of selected macroeconomic, sociocultural, and institutional determinants of exchange-rate volatility in Sri Lanka, and how differently do they affect it in Ukraine? Following previous studies, we gather annual secondary data for the years 1997–2022 from the Central Bank of Sri Lanka, National Bank of Ukraine, the IMF, and World Bank databases. The empirical strategy employs a quantitative regression framework to relate volatility to GDP per capita, foreign direct investment, unemployment, labour-force participation, the Human Capital Index, political stability, rule of law, and the Gini index; trade openness and inflation are used as controls. Results indicate that different determinants of volatility particularly political instability, trade openness, and inflation are relevant in both countries but with varying magnitudes. Notably, exchange-rate volatility is more associated with political instability in Sri Lanka compared to Ukraine. The findings clarify the relative importance of institutional and macroeconomic fundamentals in the two environments and suggest policy levers especially entrenching governance and achieving macroeconomic stability to minimize volatility.