Exchange rate volatility as a function of beneficiation

Abstract

There have been several studies by scholars and governments alike to determine how to stabilise financial markets following a surge in economic crises that have devastated the financial markets, and paralysed banking systems, leaving economies to default on their obligations. Previous research in this field focused on the role of fiscal, monetary, and exchange rate policy in macroeconomic stability, however, did not capture the effects of other contributors such as manufacturing growth and export growth on the financial markets. This study examines the relationship between mineral beneficiation and the foreign exchange market, with a focus on the exchange rate volatility and foreign reserves accumulation. Using panel regression, we empirically examine whether a percentage of mineral beneficiation does affect the foreign exchange market performance and overall economic progress in a country. The study compares the beneficiation measure of 40 countries, broken down into high-income, upper middle-income, and low-income economies relative to the United States (US). A panel regression analysis is also conducted on these countries to assess empirically the statistical significance of beneficiation on both exchange rate and foreign reserves. Based on panel regression results for exchange rate, we find a significantly negative relationship between exchange rate and beneficiation -this means that as the beneficiation measure increases, local currencies strengthen relative to the US dollar. We also found that the regression relationship between beneficiation and foreign reserves is significantly positive, which means that those countries that add value to their natural resources tend to accumulate more foreign reserves. As a result, it can be concluded that, beneficiation of mining output and trading in value-added goods would help reduce currency volatility and increase foreign reserves earned, which in turn would help stabilize the foreign exchange market and reduce the exchange market pressure