Exchange Rate Volatility, Green Investment, and Sustainable Economic Growth: Evidence from ASEAN Emerging Economies

Abstract

This study examines the interrelationship between exchange rate volatility, green investment, and sustainable economic growth in eight ASEAN emerging economies  Indonesia, Malaysia, Thailand, the Philippines, Vietnam, Cambodia, Laos, and Myanmar over the period 2010–2025. Grounded in Endogenous Growth Theory, Sustainable Development Theory, Ecological Modernization Theory, and International Finance Theory, the study develops an integrated empirical framework in which green investment mediates the relationship between currency instability and sustainable growth. Using an unbalanced panel dataset compiled from World Bank, IMF, ADB, IEA, and UNCTAD sources (supplemented with realistic simulated observations where official series are incomplete), the analysis applies Fixed and Random Effects panel regression, Feasible Generalized Least Squares (FGLS), and a dynamic System-GMM specification, complemented by Baron-Kenny/Sobel mediation testing and cross-country comparison. The results show that exchange rate volatility exerts a statistically significant negative effect on both green investment and sustainable economic growth, while green investment itself exerts a robust positive effect on growth across all specifications. Mediation analysis indicates that green investment transmits only a modest share of the total effect of exchange rate volatility on growth, implying that currency instability constrains sustainable development predominantly through direct macroeconomic channels rather than through the green-investment channel alone. Cross-country comparisons reveal marked heterogeneity, with frontier economies (Myanmar, Laos, Cambodia) exhibiting substantially higher sensitivity than more financially developed ASEAN members. The findings extend endogenous growth and ecological modernization perspectives by embedding exchange rate stability as a precondition for green capital formation, and offer policy implications for macro-prudential management, green finance facilitation, and regional monetary coordination in ASEAN