scholarly journals Exchange rate and monetary fundamentals: Long run relationship revisited

2015 ◽  
Vol 62 (1) ◽  
pp. 33-54
Author(s):  
Niyati Bhanja ◽  
Arif Dar ◽  
Aviral Tiwari
Keyword(s):  
Exchange Rate ◽  
Maximum Likelihood ◽  
Exchange Rates ◽  
Integration Method ◽  
Nominal Exchange Rate ◽  
Monetary Model ◽  
Integration Approach ◽  
Long Run ◽  
Monetary Approach ◽  
Likelihood Approach

This study re-examines the long run validity of the monetary approach to exchange rate determination for India. In particular, the long run association of bilateral nominal exchange rate of Indian rupee vis-?-vis USD, Pound-sterling, Yen and Euro against the corresponding monetary fundamentals that the model underlines has been tested using Johansen-Juselius maximum likelihood framework and Gregory-Hansen co-integration approach. Irrespective of the exchange rates the study finds a co-integrating relationship among the variables using Johansen-Juselius maximum likelihood approach. The Gregory-Hansen co-integration method allows for one break determined endogenously in three specifications also confirms the long run relationship. Our results, hence, suggest that the monetary model is a valid theory of long run equilibrium condition for the rupee-dollar, rupee-pound, rupee-yen and rupee-euro exchange rates.

Determinants of Exchange Rate in Pakistan: Revisited with Structural Break Testing

2017 ◽  
Vol 18 (4) ◽  
pp. 825-848 ◽  
Author(s):  
Syed Ali Raza ◽  
Sahar Afshan
Keyword(s):  
Economic Growth ◽  
Exchange Rate ◽  
Exchange Rates ◽  
Structural Break ◽  
Trade Openness ◽  
Terms Of Trade ◽  
Integration Approach ◽  
Long Run ◽  
Short Run ◽  
Relationship Of

This study examines the determinants of exchange rate in Pakistan by using the time-series data from 1972 to 2013. The results of the autoregressive distributed lag bound testing co-integration approach, the Johansen and Juselius co-integration approach and the Gregory and Hansen structural break co-integration approach confirm the significant long-run relationship between a few considered variables. The estimations of the long run indicate a significant negative association of exchange rates with terms of trade, trade openness and economic growth. However, money supply and inflation rate have a positive and significant effect on exchange rates. The outcomes of the error correction model suggest the negative and significant relationship of the terms of trade and trade openness on exchange rates of Pakistan in the short run. However, all other variables are found insignificant in the short run. The Granger causality test confirms the presence of a bidirectional causal relationship of the exchange rate with economics growth and trade openness in Pakistan. However, the inflation, money supply and terms of trade possess the unidirectional causality which runs from the explanatory variable to the exchange rate of the country. The present study may guide policymakers in formulating conclusive monetary and fiscal policies to ascertain the less volatile and productive exchange rate for Pakistan to attain sustainable economic growth for a long span of time.

scholarly journals An Investigation into the Sources of Depreciations in Mongolian Tugrik Exchange Rate: A Structural VAR Approach

2021 ◽  
Vol 14 (11) ◽  
pp. 529
Author(s):  
Gunbileg Ganbayar
Keyword(s):  
Exchange Rate ◽  
Exchange Rates ◽  
Forecast Error ◽  
Nominal Exchange Rate ◽  
Structural Var ◽  
The Real ◽  
Long Run ◽  
Exchange Rate Movements ◽  
Exchange Rate Level ◽  
Nominal Shocks

This paper empirically investigates the sources of fluctuations in real and nominal Mongolian Tugrik (MNT) exchange rates by estimating the structural vector autoregressive (SVAR) model over the period January 1994–May 2021 and decomposing the exchange rate series into stochastic components induced by real and nominal shocks under the assumption of the long-run neutrality of nominal shocks on the real exchange rate level. The empirical results show that the real MNT exchange rate movements are primarily due to the real shocks, while the nominal shocks have a major role in explaining nominal exchange rate movements in the short and long run. The nominal exchange rate shows a delayed over-shooting occurring between one and three years after a nominal shock hits the economy. The long-run effect of a monthly one standard deviation nominal shock on nominal MNT exchange rate is 2.5%, which results in a permanent divergence between real and nominal MNT exchange rate and causes non-cointegrated relation between real and nominal MNT exchange rates. The historical decomposition of forecast error indicates that the nominal shock plays a significant role in explaining the depreciation in nominal MNT exchange rate over the last three decades. Our recommendation is to stop “cash handling” policy, minimize monetary shock, and coordinate fiscal and monetary policies to avoid large nominal depreciation.

scholarly journals Panel Analysis of Monetary Model of ASEAN-5 Exchange Rates

2018 ◽  
Vol 11 (11) ◽  
pp. 1
Author(s):  
Noor Zainab Tunggal ◽  
Shariff Umar Shariff Abd. Kadir ◽  
Venus-Khim Sen Liew
Keyword(s):  
Exchange Rate ◽  
Interest Rate ◽  
Exchange Rates ◽  
Money Supply ◽  
The United States ◽  
Real Income ◽  
Nominal Exchange Rate ◽  
Monetary Model ◽  
Nominal Exchange Rates ◽  
The Exchange Rate

In this study, we examined whether the exchange rates in ASEAN-5 countries are driven by monetary fundamentals. We applied the panel unit root tests and found that the United States denominated nominal exchange rates of Malaysian Ringgit, Indonesian Rupiah, Philippines Peso, Singapore Dollar, and Thailand Baht are all integrated of order one. Meanwhile, relative money supply and relative real income are also integrated in the same order. Nonetheless, the relative interest rate is integrated in order zero, and it implies the uncovered interest rate parity held in ASEAN-5. By using a panel cointegration test pioneered by Pedroni (2000, 2004), we found evidence that there is a long-run relationship between nominal exchange rate and its monetary fundamentals. Consistent with the monetary model of the exchange rate, relative money supply is positively related to nominal exchange rates, while relative real income is negatively related to nominal exchange rates. Therefore, this study reveals the importance of relative real money supply and relative income for the exchange rate market players to predict and monitor ASEAN-5 exchange rates.

scholarly journals Does Pak-Rupee Exchange Rate Respond to Monetary Fundamentals? A Structural Analysis

2018 ◽  
Vol 57 (2) ◽  
pp. 175-202
Author(s):  
Muhammad Arshad Khan ◽  
Saima Nawaz
Keyword(s):  
Exchange Rate ◽  
Interest Rate ◽  
Real Income ◽  
Jel Classification ◽  
Nominal Exchange Rate ◽  
Monetary Model ◽  
Vector Autoregressive ◽  
Long Run ◽  
Short Run ◽  
Key Drivers

This study empirically examines the contribution of monetary fundamentals in explaining nominal exchange rate movements in the case of Pak-rupee vis-à-vis US-dollar over the period 1982Q2 to 2014Q2. The empirical results support the existence of cointegration relationship between nominal exchange rate and monetary fundamentals. The results reveal that relative money stocks and real income are the key drivers of exchange rate determination in Pakistan in the long-run. For dynamic interaction, the Structural Vector Autoregressive (SVAR) method is applied. Results from the SVAR show that the responses of exchange rate to shocks, originated from money supply, income, interest rate and inflation differentials, are consistent with the predictions of the flexible-price variant of the monetary model of exchange rate in the short-run. More specifically, the results indicate that inflation and interest rate differential explain maximum variations in exchange rate in the short-run. In essence, results suggest that monetary fundamentals are the key drivers of exchange rate fluctuations in Pakistan, especially in the short-run. JEL Classification: F31, F33, C32, F41 Keywords: Monetary Model, Exchange Rate, SVAR, Pakistan

Monetary model of exchange rate determination under floating and non-floating regimes

2019 ◽  
Vol 9 (2) ◽  
pp. 254-283 ◽  
Author(s):  
Oyakhilome Wallace Ibhagui
Keyword(s):  
Exchange Rate ◽  
Exchange Rates ◽  
Exchange Rate Regimes ◽  
Panel Cointegration ◽  
Nominal Exchange Rate ◽  
Sub Saharan Africa ◽  
Content Type ◽  
Vector Autoregressive ◽  
Long Run ◽  
The Impact

Purpose The purpose of this paper is to empirically analyse how different exchange rate regimes affect the links between monetary fundamentals and exchange rates in Sub-Saharan Africa. Design/methodology/approach Using the Pedroni method for panel cointegration, mean group and pooled mean group and the panel vector autoregressive technique, this study empirically investigates whether monetary fundamentals impact exchange rates similarly in both regimes. Thus, the author acquires needed and credible empirical data. Findings The result suggests that the impact is dissimilar. In the floating regime, an increase in relative money supply and relative real output depreciates and appreciates the nominal exchange rate in the long run whereas in the non-floating regime, the evidence is mixed. Thus, exchange rates bear a theoretically consistent relationship with monetary fundamentals across SSA countries with floating regimes but fails under non-floating regimes. This provides evidence that regime choice is important if the relationship between monetary fundamentals and exchange rates in SSA are to be theoretically consistent. Originality/value This study empirically incorporates the dissimilarities in exchange rate regimes in a panel framework and study the links between exchange rates and monetary fundamentals. The focus on how exchange rate regimes might alter the equilibrium relationships between exchange rates and monetary fundamentals in SSA is a pioneering experiment.

Exchange rates in India: current account monetarism in a nonlinear context

2020 ◽  
Vol 0 (0) ◽  
Author(s):  
Aditi Chaubal
Keyword(s):  
Exchange Rate ◽  
Current Account ◽  
Polynomial Function ◽  
Mean Reversion ◽  
Smooth Transition ◽  
Monetary Model ◽  
Forecast Performance ◽  
Long Run ◽  
Nonlinear Mean Reversion ◽  
Long Run Equilibrium

AbstractThe Indian exchange rate system has evolved from a pegged system to the current managed float. The study examines the presence of a long-run equilibrium in the monthly Indian exchange rate (Rs/USD) using a current account monetary model (or flexible price monetary model) while accounting for different nonlinearities over the period January 1993 to January 2014 (pre-inflation targeting period). The nonlinear adjustment to disequilibria is modelled using a nonlinear error correction model (NLECM). The nonlinear current account monetarism (CAM) model includes nonlinear transformations of long-run dynamics in the ECM to account for different nonlinearities: multiple equilibria (cubic polynomial function), nonlinear mean reversion (rational polynomial function), and smooth and gradual regime switches (exponential smooth transition autoregressive (ESTAR) function). The NLECM-ESTAR model outperforms other alternatives based on model and forecast performance measures, implying the existence of nonlinear mean reversion and smooth transition across different periods of overvaluation and undervaluation of the exchange rate. This implies the presence of asymmetric adjustment to the movements from the long-run equilibrium, but the nature of such transitions is smooth and not abrupt. The paper also establishes the uniqueness of the long-run equilibrium. A comparison to the sticky price monetary model could not be made due to stationary exchange rate disequilibrium.

scholarly journals Exchange Rates and Monetary Fundamentals: What Do We Learn from Linear and Nonlinear Regressions?

2014 ◽  
Vol 2014 ◽  
pp. 1-14 ◽  
Author(s):  
Guangfeng Zhang
Keyword(s):  
Exchange Rate ◽  
Exchange Rates ◽  
Correction Model ◽  
Exchange Rate Dynamics ◽  
Long Run ◽  
Exchange Rate Movements ◽  
Short Run ◽  
Us Dollar ◽  
Linear And Nonlinear ◽  
Japanese Yen

This paper revisits the association between exchange rates and monetary fundamentals with the focus on both linear and nonlinear approaches. With the monthly data of Euro/US dollar and Japanese yen/US dollar, our linear analysis demonstrates the monetary model is a long-run description of exchange rate movements, and our nonlinear modelling suggests the error correction model describes the short-run adjustment of deviations of exchange rates, and monetary fundamentals are capable of explaining exchange rate dynamics under an unrestricted framework.

The long-run effects of geopolitical risk on foreign exchange markets: evidence from some ASEAN countries

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Hon Chung Hui
Keyword(s):  
Exchange Rate ◽  
Exchange Rates ◽  
Foreign Exchange ◽  
Risk Index ◽  
Foreign Exchange Markets ◽  
Content Type ◽  
Long Run ◽  
Exchange Markets ◽  
Exchange Rate Models ◽  
Asean Countries

PurposeThe purpose of this paper is to analyse the long-run relationship between geopolitical risk and exchange rates in four ASEAN countries.Design/methodology/approachWe augment theoretical nominal exchange rate models available in the literature with the geopolitical risk index developed by Caldara and Iacoviello (2019), and then estimate these models using the ARDL approach to Cointegration.FindingsOur analysis uncovers evidence of Cointegration in the exchange rate models when the MYR-USD, IDR-USD, THB-USD and PHP-USD exchange rates are used as dependent variable. Next, geopolitical risk is a significant long-run driver for these exchange rates. Third, in all countries higher geopolitical risk leads to a depreciation of domestic currency.Research limitations/implicationsThere are implications for entrepreneurs, central banks, portfolio managers and arbitrageurs who actively trade in financial markets. Financial market players can benefit from a better understanding of how geopolitical events affect the portfolio of financial assets across various countries, while entrepreneurs can work out hedging strategies.Originality/valueThis is a contribution to the study of interlinkages between political risk and foreign exchange markets. It is the first study to adopt the geopolitical risk index of Caldara and Iacoviello (2019) to the study the foreign exchange markets of ASEAN countries.

Rupee-Dollar Exchange Rate and Macroeconomic Fundamentals: An Empirical Analysis Using Flexible-Price Monetary Model

2011 ◽  
Vol 12 (2) ◽  
pp. 88-105
Author(s):  
C S Shylajan ◽  
Sreejesh S ◽  
Suresh K G
Keyword(s):  
Exchange Rate ◽  
Monetary Model ◽  
Macroeconomic Variables ◽  
Indian Context ◽  
Long Run ◽  
Macroeconomic Fundamentals ◽  
Short Run ◽  
Us Dollar ◽  
Casual Relationship ◽  
Test Result

This paper empirically investigates the link between Indian rupee-US dollar exchange rates and a set of macroeconomic fundamentals using flexible-price monetary model (FPMM) for the period 1996 M1 to 2010 M12. The Johanson-Juselius cointegration test result indicates the existence of long run relationship between exchange rate and the macroeconomic variables, implying the validity of FPMM model in Indian context even though there is no short run casual relationship exist in the VECM analysis.

scholarly journals Monetary Policy and the Predictability of Nominal Exchange Rates

2020 ◽  
Author(s):  
M S Eichenbaum ◽  
B K Johannsen ◽  
S T Rebelo
Keyword(s):  
Monetary Policy ◽  
Exchange Rate ◽  
Exchange Rates ◽  
Real Exchange Rate ◽  
Open Economy ◽  
Real Exchange Rates ◽  
Nominal Exchange Rate ◽  
Medium Size ◽  
Inflation Rates ◽  
Nominal Exchange Rates

Abstract This article studies how the monetary policy regime affects the relative importance of nominal exchange rates and inflation rates in shaping the response of real exchange rates to shocks. We document two facts about inflation-targeting countries. First, the current real exchange rate predicts future changes in the nominal exchange rate. Second, the real exchange rate is a poor predictor of future inflation rates. We estimate a medium-size, open-economy DSGE model that accounts quantitatively for these facts as well as other empirical properties of real and nominal exchange rates. The key estimated shocks that drive the dynamics of exchange rates and their covariance with inflation are disturbances to the foreign demand for dollar-denominated bonds.

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