Beyond Economics: Governance, Inequality, and the Exchange Rate Puzzle in Emerging Economies

This study explores the determinants of exchange rate volatility in three emerging economies—Sri Lanka, Ukraine, and Peru—focusing on the fluctuations of their respective currencies against the US dollar over the period 1997–2022. Employing secondary data from authoritative sources such as the International Monetary Fund and the World Bank, the analysis utilizes multiple regression techniques to evaluate the impact of macroeconomic, institutional, and sociocultural variables. These include GDP per capita, foreign direct investment (FDI), unemployment, political stability, social contributions, and human capital development. Comparative results indicate that Sri Lanka's model yields the highest explanatory power, Ukraine exhibits moderate predictability, and Peru demonstrates relatively weaker statistical associations, highlighting the influence of differing national economic structures. GDP per capita exerts a stabilizing effect in Sri Lanka and Ukraine, but proves statistically insignificant in the case of Peru. FDI appears to amplify exchange rate volatility in Sri Lanka and Ukraine whereas its effect in Peru is minimal, pointing to more consistent and stable investment channels. Unemployment and social contributions contribute to volatility in Sri Lanka and Ukraine, while in Peru, increased labor participation is associated with reduced volatility. Institutional quality, particularly political stability and administrative capacity, presents divergent effects; Peru benefits from institutional robustness, while weaker governance undermines currency stability in Sri Lanka and Ukraine. The study underscores the intricate and context-specific interplay between economic fundamentals and institutional effectiveness in determining exchange rate behavior. These findings JEL Codes : F31, F41, E44, E24, O11,, P33, D63, G18