The Effect of Economic Complexity on Exchange Rate in Selected Knowledge Based Developing Countries

The exchange rate refers to the ratio of prices in two countries and its deviation from the balanced rate causes instability in macroeconomic variables such as Import, Export, price level, and financial markets. Also, regarding the increasing pace of the global economy toward a knowledge-based economy, it seems important to study the effect of the economic complexity on other economic variables. In this study, economic complexity, which indicates the degree of diversity and ubiquity of countries' products, has been used as one of the most important components of the knowledge-based economy. it is clear that more economic complexity leads to more competitive ability in the global market and, as a consequence, will lower the exchange rate. The present study has investigated the impact of Economic Complexity on exchange rates in selected developing knowledge-based countries during 2007-2019 using GMM. The results show that Economic Complexity had a negative and significant effect on the exchange rate. In addition, other control variables like money supply had a positive effect, and trade balance and political stability had a negative impact on the exchange rate. Therefore, governments' policies should lead to more economic complexity.