The objective of this paper is to test the exchange rate dynamics by measuring the speed of adjustment of prices. In this overshooting model, we assume price stickiness (gradual adjustment). If the prices are adjusted instantaneously, we will have the monetarist view; otherwise, the overshooting one, due to slow adjustment of prices and consequently, it affects all the other variables and slowly the exchange rate. We outline, here, an approach of testing the dynamic models of exchange rate determination. This approach is based upon the idea that it is difficult to measure directly the process by which market participants revise their expectations about current and future money supplies. On the other hand, it is possible to make indirect inferences about these expectations through a time series analysis of related financial and real prices. Empirical tests of the above exchange rate dynamics are taking place for four different exchange rates ($/€, $/£, C$/$, and ¥/$). Theoretical discussion and empirical evidence have emphasized the impact of gradual adjustment and “overshooting” that it is taking place. Only for the $/€ exchange rate the monetarist model is correct.
Inferences from Interest Rate Behavior for Monetary Policy SignalingIOSR Journals
Weak mean reversion of interest rates towards the long term mean suggests high probability of agents in financial markets failing to interpret monetary policy signalling efficiently and financial market related interest rate unable to achieve equilibrium. Increased randomness penetrating interest rate markets is due to the weak monetary policy signalling effect which dilutes information flow from central banks’ to agents in the financial market. In such cases the effectiveness monetary policy erodes as it departs from the objectives of central banks and financial regulators
This study modeled volatility and daily exchange rate movement in Nigeria with daily exchange rate between Nigeria Naira and US Dollar from January 2, 2001 to May 20, 2019 collected from the Central Bank of Nigeria (CBN). The results of the estimated models revealed that conditional variance (volatility) has positive and significant relationship with exchange rate returns between Nigeria Naira and US Dollars, which corroborates the theory that predicts positive relationship between return and volatility for risk averse investors. Also found that exchange rate volatility between Naira / US Dollar is persistent. It was also discovered that goods news produces more volatility than bad news of equal magnitude. The researchers therefore suggested that the Central Bank of Nigeria should always proffer timely intervention to reduce the volatility persistence. This will go a long way to counteract or moderate the excess volatility between Naira and US Dollar transactions.
Inferences from Interest Rate Behavior for Monetary Policy SignalingIOSR Journals
Weak mean reversion of interest rates towards the long term mean suggests high probability of agents in financial markets failing to interpret monetary policy signalling efficiently and financial market related interest rate unable to achieve equilibrium. Increased randomness penetrating interest rate markets is due to the weak monetary policy signalling effect which dilutes information flow from central banks’ to agents in the financial market. In such cases the effectiveness monetary policy erodes as it departs from the objectives of central banks and financial regulators
This study modeled volatility and daily exchange rate movement in Nigeria with daily exchange rate between Nigeria Naira and US Dollar from January 2, 2001 to May 20, 2019 collected from the Central Bank of Nigeria (CBN). The results of the estimated models revealed that conditional variance (volatility) has positive and significant relationship with exchange rate returns between Nigeria Naira and US Dollars, which corroborates the theory that predicts positive relationship between return and volatility for risk averse investors. Also found that exchange rate volatility between Naira / US Dollar is persistent. It was also discovered that goods news produces more volatility than bad news of equal magnitude. The researchers therefore suggested that the Central Bank of Nigeria should always proffer timely intervention to reduce the volatility persistence. This will go a long way to counteract or moderate the excess volatility between Naira and US Dollar transactions.
This paper analysed the forecasting ability of yield-curve as a predictor of the short-run fluctuations in economic activities in Namibia. The study employed the techniques of unit root, cointegration, impulse response functions and forecast error variance decomposition on the quarterly data covering the period 1996 to 2015. The results revealed a negative relationship between the term structure of interest rates and economic activities, though statistically insignificant. This suggests that the yield-curve has no forecasting ability as a predictor of economic activity in Namibia.
Empirical literature on money demand is mainly based on the estimation of a long run relation by means of time-invariant cointergration approach. Taiwan has experienced the economic and financial regime change since 1979. The purpose of this paper is to test structural breaks in Taiwan long run money demand equation. We examine six of the most influential specifications proposed in the literature. The classical set of explanatory variables (e.g. income and interest rates) is extended on the base of a number underlying economic reasons related to financial, labor and international portfolio characteristics. The results suggest that international financial market variables and the classical specifications are the key determinants of structural instability observed in Taiwan broad money.
A study on the impact of global currency fluctuations with a special focus to...Aman Vij
The paper discusses about the factors influencing and impact of currency fluctuations on global economy. Then we shift our focus to Indian rupees factors which causes the Rupee fluctuations has been discussed. In the end we discuss about the steps taken by the RBI and the government and what else can be done by investors to lessen the impact of Global currency fluctuations and what can be done to prevent Indian Rupee fluctuation.
International Journal of Business and Management Invention (IJBMI) is an international journal intended for professionals and researchers in all fields of Business and Management. IJBMI publishes research articles and reviews within the whole field Business and Management, new teaching methods, assessment, validation and the impact of new technologies and it will continue to provide information on the latest trends and developments in this ever-expanding subject. The publications of papers are selected through double peer reviewed to ensure originality, relevance, and readability. The articles published in our journal can be accessed online.
Developing economies are different than developed economies in many aspects, i.e., in terms of institutional framework and political situation etc. Thus, the monetary policy needed in developing countries is also different than developed countries. The goal of this study is to investigate exchange rate channel of monetary transmission mechanism in a developing country’s setup. The variables included in our analysis are interest rate, exchange rate, exports, consumer price index and gross domestic product. Johansen cointegration technique is applied to analyze the long run relationship among variables while multivariate VECM granger causality test is used to explore the direction of causality among the set of our variables. We use annual data ranging from 1980 to 2015 while taking account of the limitations of time series data. Our findings suggest that output has a negative long run relationship with exchange rate and interest rate, positive relationship with exports and no statistically significant relationship with inflation. Interest rate granger causes all four of our variables thus showing the power of this policy tool. Exchange rate causes exports, consumer price index and output which means exchange rate is the second most powerful variable in our analysis. Output is granger caused by interest rate, exports and exchange rate which confirms the sensitivity of output to these variables. Consumer price index is granger caused by all four of our variables and came out to be the most sensitive variable in our analysis.
The paper re-assesses the impact of exchange rate regimes on macroeconomic performance. We test for the relationship between de jure and de facto exchange rate classifications on the one hand, and inflation, output growth and output volatility on the other. We find that, once high-inflation outliers are excluded from the sample, only hard exchange rate pegs are associated with lower inflation compared to the floating regime. There is no significant relationship between output growth and exchange rate regimes, confirming results from previous studies. De jure pegged regimes (broadly defined) are correlated with higher output volatility, but this relationship is reversed for the de facto classification. The last result points to a potential endogeneity problem present when the de facto classification is used in testing for the relationship between exchange rate behavior and macroeconomic performance.
Authored by: Maryla Maliszewska, Wojciech Maliszewski
Published in 2004
Abstract The main purpose of this paper is to investigate whether stock prices and exchange rates are related to each
other or not. Both the short term and the long term association between these variables are discovered. The study applies
monthly and quarterly data on two gulf countries, including Kingdom Saudi Arabia (KSA) and United Arab Emirate (UAE)
for the period January 2008 to December 2009. The results of this study in the short term found that the exchange rate
influence positively on the stock market price index for United Arab Emirate and there is no association between them for
Kingdom Saudi Arabia. Moreover the study in the long term found that the exchange rate influence negatively on stock
market price index for the United Arab Emirate. While no association between these variables in Kingdom Saudi Arabia.
Impact of Macroeconomic Factors on Share Price Index in Vietnam’s Stock Markettheijes
This paper investigates the macroeconomic determinants of share price in the stock market of Vietnam. The investigation was conducted by using a VECM econometric methodology and revealed thatVietnam’s stock market prices are chiefly determined by economic activities: market price index, inflation, money supply and exchange rate. An increase in market price index and money supply makes share price, while the increase of inflation (CPI) and exchange rate reduces share price. The study’s result showed that Vietnam’s stock market can be replaced by investors of foreign currency (USD), while the exchange rate tends to rise.
Running head: NOMINAL AND REAL EXCHANGE FLUCTUATIONS 1
NOMINAL AND REAL EXCHANGE FLUCTUATIONS 2
Causes of nominal and real exchange rate fluctuations, misalignments and the exchange rate policy
Student`s Name
Instructor
Institution
Course
Date
Fluctuations in Nominal Exchange Rate Comment by Microsoft: Can add introduction part: for example, “In 2008, both the international financial market and the global economy were turbulent due to the financial and economic crisis. This crisis has caused violent exchange rate fluctuations, and lead to an uneven effect on the currencies of major industrial countries. For example, the euro and the dollar move significantly and have experienced appreciation and depreciation. + situation in Turkey + real/nominal exchange rate why important (u did already) + my study is…”
The monetary approach is useful in explaining exchange rate fluctuations. Its predictions are specific, and in case of the relative money supply increases, so does the relative price level. The monetary approach is useful in explaining the exchange rate fluctuations since there is a better proportion of the movement that is relative to the money supply. There is unity in the elasticity of the spot rate. Such an agreement is based on the relative money supply.
Purchasing Power Parity Comment by Microsoft: Need to use PPP as a theory, and use inflation differential to explain perentage change of nominal exchange rate
Ans use formula : NER = - *
Otherwise, how u get D. inflation?
Purchasing power parity= P1/P2
The purchasing power parity for Turkey was 1.6 per international dollar marking an annual growth rate of 12.59%
Interest Parity Condition Comment by Microsoft: Same problem, need to mention Interest rate differentials, Inflation differentials, Monetary growth differentials, Trade balance by using the theory (Purchasing Power Parity, interest parity condition, money supply and trade balance). then Combine the theory and result, whether those variable above could be the reason that lead to percentage change in nominal exchange rate based on the monetary approach.
Based on result, whether the monetary approach is useful in explaining exchange rate fluctuations. If not, what are the limitations
Methodology part require theory +data analysis.
Beginning use theory to explain , later on u should check whether the graph u get is consist with hypothesis that based on your theory. And answer the question whether relative productivity growth rates explain the movements in real exchange rate movements
Is meaningless to put the graph without explanation.
Moreover, could explain how u measure relative productivity of tradable goods, use GDP or employment for relative productivity or industrial production
(1+ Base currency)= Forward foreign exchange rate/Current spot exchange rate* (1+ quoted currency)
Interest parity condition= 1.32* (1+0.0117)/ (1+0.
Running head NOMINAL AND REAL EXCHANGE FLUCTUATIONS .docxglendar3
Running head: NOMINAL AND REAL EXCHANGE FLUCTUATIONS 1
NOMINAL AND REAL EXCHANGE FLUCTUATIONS 2
Causes of nominal and real exchange rate fluctuations, misalignments and the exchange rate policy
Student`s Name
Instructor
Institution
Course
Date
Fluctuations in Nominal Exchange Rate Comment by Microsoft: Can add introduction part: for example, “In 2008, both the international financial market and the global economy were turbulent due to the financial and economic crisis. This crisis has caused violent exchange rate fluctuations, and lead to an uneven effect on the currencies of major industrial countries. For example, the euro and the dollar move significantly and have experienced appreciation and depreciation. + situation in Turkey + real/nominal exchange rate why important (u did already) + my study is…”
The monetary approach is useful in explaining exchange rate fluctuations. Its predictions are specific, and in case of the relative money supply increases, so does the relative price level. The monetary approach is useful in explaining the exchange rate fluctuations since there is a better proportion of the movement that is relative to the money supply. There is unity in the elasticity of the spot rate. Such an agreement is based on the relative money supply.
Purchasing Power Parity Comment by Microsoft: Need to use PPP as a theory, and use inflation differential to explain perentage change of nominal exchange rate
Ans use formula : NER = - *
Otherwise, how u get D. inflation?
Purchasing power parity= P1/P2
The purchasing power parity for Turkey was 1.6 per international dollar marking an annual growth rate of 12.59%
Interest Parity Condition Comment by Microsoft: Same problem, need to mention Interest rate differentials, Inflation differentials, Monetary growth differentials, Trade balance by using the theory (Purchasing Power Parity, interest parity condition, money supply and trade balance). then Combine the theory and result, whether those variable above could be the reason that lead to percentage change in nominal exchange rate based on the monetary approach.
Based on result, whether the monetary approach is useful in explaining exchange rate fluctuations. If not, what are the limitations
Methodology part require theory +data analysis.
Beginning use theory to explain , later on u should check whether the graph u get is consist with hypothesis that based on your theory. And answer the question whether relative productivity growth rates explain the movements in real exchange rate movements
Is meaningless to put the graph without explanation.
Moreover, could explain how u measure relative productivity of tradable goods, use GDP or employment for relative productivity or industrial production
(1+ Base currency)= Forward foreign exchange rate/Current spot exchange rate* (1+ quoted currency)
Interest parity condition= 1.32* (1+0.0117)/ (1+0.
Running head NOMINAL AND REAL EXCHANGE FLUCTUATIONS .docxtodd581
Running head: NOMINAL AND REAL EXCHANGE FLUCTUATIONS 1
NOMINAL AND REAL EXCHANGE FLUCTUATIONS 2
Causes of nominal and real exchange rate fluctuations, misalignments and the exchange rate policy
Student`s Name
Instructor
Institution
Course
Date
Fluctuations in Nominal Exchange Rate Comment by Microsoft: Can add introduction part: for example, “In 2008, both the international financial market and the global economy were turbulent due to the financial and economic crisis. This crisis has caused violent exchange rate fluctuations, and lead to an uneven effect on the currencies of major industrial countries. For example, the euro and the dollar move significantly and have experienced appreciation and depreciation. + situation in Turkey + real/nominal exchange rate why important (u did already) + my study is…”
The monetary approach is useful in explaining exchange rate fluctuations. Its predictions are specific, and in case of the relative money supply increases, so does the relative price level. The monetary approach is useful in explaining the exchange rate fluctuations since there is a better proportion of the movement that is relative to the money supply. There is unity in the elasticity of the spot rate. Such an agreement is based on the relative money supply.
Purchasing Power Parity Comment by Microsoft: Need to use PPP as a theory, and use inflation differential to explain perentage change of nominal exchange rate
Ans use formula : NER = - *
Otherwise, how u get D. inflation?
Purchasing power parity= P1/P2
The purchasing power parity for Turkey was 1.6 per international dollar marking an annual growth rate of 12.59%
Interest Parity Condition Comment by Microsoft: Same problem, need to mention Interest rate differentials, Inflation differentials, Monetary growth differentials, Trade balance by using the theory (Purchasing Power Parity, interest parity condition, money supply and trade balance). then Combine the theory and result, whether those variable above could be the reason that lead to percentage change in nominal exchange rate based on the monetary approach.
Based on result, whether the monetary approach is useful in explaining exchange rate fluctuations. If not, what are the limitations
Methodology part require theory +data analysis.
Beginning use theory to explain , later on u should check whether the graph u get is consist with hypothesis that based on your theory. And answer the question whether relative productivity growth rates explain the movements in real exchange rate movements
Is meaningless to put the graph without explanation.
Moreover, could explain how u measure relative productivity of tradable goods, use GDP or employment for relative productivity or industrial production
(1+ Base currency)= Forward foreign exchange rate/Current spot exchange rate* (1+ quoted currency)
Interest parity condition= 1.32* (1+0.0117)/ (1+0.
This paper analysed the forecasting ability of yield-curve as a predictor of the short-run fluctuations in economic activities in Namibia. The study employed the techniques of unit root, cointegration, impulse response functions and forecast error variance decomposition on the quarterly data covering the period 1996 to 2015. The results revealed a negative relationship between the term structure of interest rates and economic activities, though statistically insignificant. This suggests that the yield-curve has no forecasting ability as a predictor of economic activity in Namibia.
Empirical literature on money demand is mainly based on the estimation of a long run relation by means of time-invariant cointergration approach. Taiwan has experienced the economic and financial regime change since 1979. The purpose of this paper is to test structural breaks in Taiwan long run money demand equation. We examine six of the most influential specifications proposed in the literature. The classical set of explanatory variables (e.g. income and interest rates) is extended on the base of a number underlying economic reasons related to financial, labor and international portfolio characteristics. The results suggest that international financial market variables and the classical specifications are the key determinants of structural instability observed in Taiwan broad money.
A study on the impact of global currency fluctuations with a special focus to...Aman Vij
The paper discusses about the factors influencing and impact of currency fluctuations on global economy. Then we shift our focus to Indian rupees factors which causes the Rupee fluctuations has been discussed. In the end we discuss about the steps taken by the RBI and the government and what else can be done by investors to lessen the impact of Global currency fluctuations and what can be done to prevent Indian Rupee fluctuation.
International Journal of Business and Management Invention (IJBMI) is an international journal intended for professionals and researchers in all fields of Business and Management. IJBMI publishes research articles and reviews within the whole field Business and Management, new teaching methods, assessment, validation and the impact of new technologies and it will continue to provide information on the latest trends and developments in this ever-expanding subject. The publications of papers are selected through double peer reviewed to ensure originality, relevance, and readability. The articles published in our journal can be accessed online.
Developing economies are different than developed economies in many aspects, i.e., in terms of institutional framework and political situation etc. Thus, the monetary policy needed in developing countries is also different than developed countries. The goal of this study is to investigate exchange rate channel of monetary transmission mechanism in a developing country’s setup. The variables included in our analysis are interest rate, exchange rate, exports, consumer price index and gross domestic product. Johansen cointegration technique is applied to analyze the long run relationship among variables while multivariate VECM granger causality test is used to explore the direction of causality among the set of our variables. We use annual data ranging from 1980 to 2015 while taking account of the limitations of time series data. Our findings suggest that output has a negative long run relationship with exchange rate and interest rate, positive relationship with exports and no statistically significant relationship with inflation. Interest rate granger causes all four of our variables thus showing the power of this policy tool. Exchange rate causes exports, consumer price index and output which means exchange rate is the second most powerful variable in our analysis. Output is granger caused by interest rate, exports and exchange rate which confirms the sensitivity of output to these variables. Consumer price index is granger caused by all four of our variables and came out to be the most sensitive variable in our analysis.
The paper re-assesses the impact of exchange rate regimes on macroeconomic performance. We test for the relationship between de jure and de facto exchange rate classifications on the one hand, and inflation, output growth and output volatility on the other. We find that, once high-inflation outliers are excluded from the sample, only hard exchange rate pegs are associated with lower inflation compared to the floating regime. There is no significant relationship between output growth and exchange rate regimes, confirming results from previous studies. De jure pegged regimes (broadly defined) are correlated with higher output volatility, but this relationship is reversed for the de facto classification. The last result points to a potential endogeneity problem present when the de facto classification is used in testing for the relationship between exchange rate behavior and macroeconomic performance.
Authored by: Maryla Maliszewska, Wojciech Maliszewski
Published in 2004
Abstract The main purpose of this paper is to investigate whether stock prices and exchange rates are related to each
other or not. Both the short term and the long term association between these variables are discovered. The study applies
monthly and quarterly data on two gulf countries, including Kingdom Saudi Arabia (KSA) and United Arab Emirate (UAE)
for the period January 2008 to December 2009. The results of this study in the short term found that the exchange rate
influence positively on the stock market price index for United Arab Emirate and there is no association between them for
Kingdom Saudi Arabia. Moreover the study in the long term found that the exchange rate influence negatively on stock
market price index for the United Arab Emirate. While no association between these variables in Kingdom Saudi Arabia.
Impact of Macroeconomic Factors on Share Price Index in Vietnam’s Stock Markettheijes
This paper investigates the macroeconomic determinants of share price in the stock market of Vietnam. The investigation was conducted by using a VECM econometric methodology and revealed thatVietnam’s stock market prices are chiefly determined by economic activities: market price index, inflation, money supply and exchange rate. An increase in market price index and money supply makes share price, while the increase of inflation (CPI) and exchange rate reduces share price. The study’s result showed that Vietnam’s stock market can be replaced by investors of foreign currency (USD), while the exchange rate tends to rise.
Running head: NOMINAL AND REAL EXCHANGE FLUCTUATIONS 1
NOMINAL AND REAL EXCHANGE FLUCTUATIONS 2
Causes of nominal and real exchange rate fluctuations, misalignments and the exchange rate policy
Student`s Name
Instructor
Institution
Course
Date
Fluctuations in Nominal Exchange Rate Comment by Microsoft: Can add introduction part: for example, “In 2008, both the international financial market and the global economy were turbulent due to the financial and economic crisis. This crisis has caused violent exchange rate fluctuations, and lead to an uneven effect on the currencies of major industrial countries. For example, the euro and the dollar move significantly and have experienced appreciation and depreciation. + situation in Turkey + real/nominal exchange rate why important (u did already) + my study is…”
The monetary approach is useful in explaining exchange rate fluctuations. Its predictions are specific, and in case of the relative money supply increases, so does the relative price level. The monetary approach is useful in explaining the exchange rate fluctuations since there is a better proportion of the movement that is relative to the money supply. There is unity in the elasticity of the spot rate. Such an agreement is based on the relative money supply.
Purchasing Power Parity Comment by Microsoft: Need to use PPP as a theory, and use inflation differential to explain perentage change of nominal exchange rate
Ans use formula : NER = - *
Otherwise, how u get D. inflation?
Purchasing power parity= P1/P2
The purchasing power parity for Turkey was 1.6 per international dollar marking an annual growth rate of 12.59%
Interest Parity Condition Comment by Microsoft: Same problem, need to mention Interest rate differentials, Inflation differentials, Monetary growth differentials, Trade balance by using the theory (Purchasing Power Parity, interest parity condition, money supply and trade balance). then Combine the theory and result, whether those variable above could be the reason that lead to percentage change in nominal exchange rate based on the monetary approach.
Based on result, whether the monetary approach is useful in explaining exchange rate fluctuations. If not, what are the limitations
Methodology part require theory +data analysis.
Beginning use theory to explain , later on u should check whether the graph u get is consist with hypothesis that based on your theory. And answer the question whether relative productivity growth rates explain the movements in real exchange rate movements
Is meaningless to put the graph without explanation.
Moreover, could explain how u measure relative productivity of tradable goods, use GDP or employment for relative productivity or industrial production
(1+ Base currency)= Forward foreign exchange rate/Current spot exchange rate* (1+ quoted currency)
Interest parity condition= 1.32* (1+0.0117)/ (1+0.
Running head NOMINAL AND REAL EXCHANGE FLUCTUATIONS .docxglendar3
Running head: NOMINAL AND REAL EXCHANGE FLUCTUATIONS 1
NOMINAL AND REAL EXCHANGE FLUCTUATIONS 2
Causes of nominal and real exchange rate fluctuations, misalignments and the exchange rate policy
Student`s Name
Instructor
Institution
Course
Date
Fluctuations in Nominal Exchange Rate Comment by Microsoft: Can add introduction part: for example, “In 2008, both the international financial market and the global economy were turbulent due to the financial and economic crisis. This crisis has caused violent exchange rate fluctuations, and lead to an uneven effect on the currencies of major industrial countries. For example, the euro and the dollar move significantly and have experienced appreciation and depreciation. + situation in Turkey + real/nominal exchange rate why important (u did already) + my study is…”
The monetary approach is useful in explaining exchange rate fluctuations. Its predictions are specific, and in case of the relative money supply increases, so does the relative price level. The monetary approach is useful in explaining the exchange rate fluctuations since there is a better proportion of the movement that is relative to the money supply. There is unity in the elasticity of the spot rate. Such an agreement is based on the relative money supply.
Purchasing Power Parity Comment by Microsoft: Need to use PPP as a theory, and use inflation differential to explain perentage change of nominal exchange rate
Ans use formula : NER = - *
Otherwise, how u get D. inflation?
Purchasing power parity= P1/P2
The purchasing power parity for Turkey was 1.6 per international dollar marking an annual growth rate of 12.59%
Interest Parity Condition Comment by Microsoft: Same problem, need to mention Interest rate differentials, Inflation differentials, Monetary growth differentials, Trade balance by using the theory (Purchasing Power Parity, interest parity condition, money supply and trade balance). then Combine the theory and result, whether those variable above could be the reason that lead to percentage change in nominal exchange rate based on the monetary approach.
Based on result, whether the monetary approach is useful in explaining exchange rate fluctuations. If not, what are the limitations
Methodology part require theory +data analysis.
Beginning use theory to explain , later on u should check whether the graph u get is consist with hypothesis that based on your theory. And answer the question whether relative productivity growth rates explain the movements in real exchange rate movements
Is meaningless to put the graph without explanation.
Moreover, could explain how u measure relative productivity of tradable goods, use GDP or employment for relative productivity or industrial production
(1+ Base currency)= Forward foreign exchange rate/Current spot exchange rate* (1+ quoted currency)
Interest parity condition= 1.32* (1+0.0117)/ (1+0.
Running head NOMINAL AND REAL EXCHANGE FLUCTUATIONS .docxtodd581
Running head: NOMINAL AND REAL EXCHANGE FLUCTUATIONS 1
NOMINAL AND REAL EXCHANGE FLUCTUATIONS 2
Causes of nominal and real exchange rate fluctuations, misalignments and the exchange rate policy
Student`s Name
Instructor
Institution
Course
Date
Fluctuations in Nominal Exchange Rate Comment by Microsoft: Can add introduction part: for example, “In 2008, both the international financial market and the global economy were turbulent due to the financial and economic crisis. This crisis has caused violent exchange rate fluctuations, and lead to an uneven effect on the currencies of major industrial countries. For example, the euro and the dollar move significantly and have experienced appreciation and depreciation. + situation in Turkey + real/nominal exchange rate why important (u did already) + my study is…”
The monetary approach is useful in explaining exchange rate fluctuations. Its predictions are specific, and in case of the relative money supply increases, so does the relative price level. The monetary approach is useful in explaining the exchange rate fluctuations since there is a better proportion of the movement that is relative to the money supply. There is unity in the elasticity of the spot rate. Such an agreement is based on the relative money supply.
Purchasing Power Parity Comment by Microsoft: Need to use PPP as a theory, and use inflation differential to explain perentage change of nominal exchange rate
Ans use formula : NER = - *
Otherwise, how u get D. inflation?
Purchasing power parity= P1/P2
The purchasing power parity for Turkey was 1.6 per international dollar marking an annual growth rate of 12.59%
Interest Parity Condition Comment by Microsoft: Same problem, need to mention Interest rate differentials, Inflation differentials, Monetary growth differentials, Trade balance by using the theory (Purchasing Power Parity, interest parity condition, money supply and trade balance). then Combine the theory and result, whether those variable above could be the reason that lead to percentage change in nominal exchange rate based on the monetary approach.
Based on result, whether the monetary approach is useful in explaining exchange rate fluctuations. If not, what are the limitations
Methodology part require theory +data analysis.
Beginning use theory to explain , later on u should check whether the graph u get is consist with hypothesis that based on your theory. And answer the question whether relative productivity growth rates explain the movements in real exchange rate movements
Is meaningless to put the graph without explanation.
Moreover, could explain how u measure relative productivity of tradable goods, use GDP or employment for relative productivity or industrial production
(1+ Base currency)= Forward foreign exchange rate/Current spot exchange rate* (1+ quoted currency)
Interest parity condition= 1.32* (1+0.0117)/ (1+0.
In this paper we evaluate critically the popular Mundell-Fleming model from the standpoint the exogenous interest rate heterodox approach. We criticize the assumptions of exogenous money supply, "perfect" international capital markets and inelastic exchange rate expectations. We show that in a more realistic framework none of the main results of the Mundell-Fleming model on the relative effectiveness of fiscal and monetary policies are valid, either in floating and fixed exchange rate regimes. We conclude that ,within certain very asymmetric bounds, the central bank has the power to determine the domestic interest rate exogenously even in open economy with free capital mobility and that there is no automatic market mechanism to ensure the automatic adjustment of the interest rate and exchange rate to sustainable levels.
Exchange Rate Overshooting and its Impact on the Balance of Trade for the Tur...Hüseyin Tekler
Exchange rate overshooting is the short run phenomenon under the Dornbusch Model presented in 1976. We are really desiderative to find out whether the overshoots are for the short run or for the long run period for the Turkish economy. The estimated result using the Johansen Julius method and VECM, we have found that overshooting is for the short run period as opposed to the findings of Bahmani-Oskooee & Orhan (2000) while the Purchasing power parity [PPP] does not hold for the Turkish economy.
Effect of Treasury Bill Rate on Exchange Rate Level and Volatility in Kenya.IJMREMJournal
Government through central bank sells or purchase Treasury bills to represent government securities’ interest
rate in open markets operations with the aim of influencing liaquidity conditions in the financial system. Again
central bank make adjustment in the treasury bill rates with the intention of devaluing her currency so as to
encourage export and discourage imports. Kenya has been facing high volatility of exchange rate and a
continuous depreciation of Kenya shilling to US dollar. Depreciation of the home currency decreases return on
investment when investing internationally. A combination of a stable exchange rate environment and a
competitive currency attracts investment, increase aggregate output and expand country's economic
prosperities. This study aimed at evaluating the effect of 91-day Treasury bill rate on exchange rate level and
volatility. Monthly series data on US Dollar-Kenya shilling bilateral exchange rate, 91-day Treasury bill rates,
net foreign exchange intervention by central Bank, central bank rate, and inflation rate was purposively selected
from January 1997 to June 2016 was used for analysis. Using GARCH model it was found that holding other
things equal, a unit change in 91-day Treasury bill rate influence the exchange rate volatility by 2.5790 units in
the same direction and at the same time changes the level of exchange rate return by 1.5696 units. Therefore,
increasing 91-day Treasury bill rate increases the volatility of the monthly Kenya shilling to US dollar returns
and appreciates Kenyan shilling against the US dollar.
In this paper we present a heterodox open-economy macroeconomic model aiming to establish an alternative view to the "New Consensus" model and analyze the determinants of long-run inflation, the monetary policy transmission channels, the costs of such policy and some barriers to its implementation.
The open-economy New Consensus model with inflation targeting is based on the following theoretical structure: (i) the potential output is determined according to the neoclassical theory of value and distribution; (ii) output depends on the real interest rate and the real exchange rate (iii) the Phillips curve is accelerationist (iv) the exchange rate determination depends on the uncovered interest rate parity in the short run and on the purchasing power parity in the long run; (v) a Taylor rule.
The main results of this model are well known. There is no trade-off between inflation and productive capacity, since the later is independent of the effective output; and such policy can always be applied, because it is always possible to the Monetary Authority to fix the real interest rate in line with the natural rate of interest.
The alternative model proposed follows the same simplified scheme of the New Consensus model, but altering significantly some theoretical assumptions. (i) First, the potential output or productive capacity of the economy follows the long-run expected effective demand. We use the Sraffian supermultiplier to model the demand led growth of productive capacity. (ii) the output growth rate depends on the real interest rate (through the effect on autonomous spending) and the real exchange rate (through the effect on exports), (iii) the Phillips curve is non accelerationist (partial inertia hypothesis) and depends on the role of nominal exchange rate, on the imported inflation and on the degree of distributive conflict, (iv) the nominal exchange rate depends on the interest rate differential and is subject to speculation, and (v) a Taylor rule.
We analyze the alternative model in terms of analytic solution and computer simulations. The main results of this model is that the long-run inflation will depend on imported inflation, on the distributive conflict and on the inertia degree in the economy; demand shocks influences inflation only in the short run, so the main channel to control inflation by MA is by controlling the nominal exchange rate appreciation through the maintenance of an interest rate differential with the rest of the world.
From the cost of policy standpoint, the results also differ from that proposed by the New Consensus. First, we show that the policy of inflation control is not neutral in terms of growth rate of productive capacity. This means that a higher inflation targeting or a lower imported inflation ultimately lead to a higher growth rate of productive capacity (so the external constraint can appear in the form of higher imported inflation); moreover, as the policy of inflation control depends largely on a p
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The Linkages of Financial Liberalization and Currency Stability: What do we l...Suwandi, Dr. SE.,MSi
The tendency of repeating history has made any financial crisis a valuable source to be explored and studied. It will make people be more prepared and ready to anticipate. This paper examined the nature of linkages between exchange rate and macroeconomic fundamentals over
1997-2004. It investigated the evidence on both the short- and long-run effects of exchange rate determinant factors using co-integration theory. It also explored the stability of rupiah during the pre and post economic crisis, seeking whether the Indonesian currency was overshooting or not. To test the stability of rupiah after monetary and fiscal liberalization, we employed the Chow test. The results revealed that the rupiah was overshooting during the crisis' period and there was a structural change of rupiah after 1998. Due to the significant effects of interest rate and exchange rate on the currency stability, it is important to the Indonesia’s monetary institution to be aware of these two variables, especially in stabilizing the economic performance after the financial liberalization. The elasticity obtained for relative money supply (m) is greater than unity indicating that this result consistent with overshooting hypothesis.
This study examined the influence of the characteristics of the audit committee on Palestinian firms’ value. The research explores precisely the effect on the Audit Committee characteristics’ efficiency, namely, independence, expertise, evaluating the relationship among dependent and independent variables. Secondary data collected from a list of companies were registered in the Palestine Stock Exchange from 2011 to 2018. Individual variables considered are the independence & expertise of the audit committee, whereas the ROA is employed as the dependent variable as an indicator of a firm’s value. The results showed that the Audit Committee’s independence & expertise substantially positive with ROA. The study concluded that the audit committee’s characteristics are enhancing firm performance. The implications of this study’s findings can be used by decisions and policymakers, the firm’s management, and other stockholders’ interests to create reliable ties between agents and the principals.
There is increasing acceptability of emotional intelligence as a major factor in personality assessment and effective human resource management. Emotional intelligence as the ability to build capacity, empathize, co-operate, motivate and develop others cannot be divorced from both effective performance and human resource management systems. The human person is crucial in defining organizational leadership and fortunes in terms of challenges and opportunities and walking across both multinational and bilateral relationships. The growing complexity of the business world requires a great deal of self-confidence, integrity, communication, conflict, and diversity management to keep the global enterprise within the paths of productivity and sustainability. Using the exploratory research design and 255 participants the result of this original study indicates a strong positive correlation between emotional intelligence and effective human resource management. The paper offers suggestions on further studies between emotional intelligence and human capital development and recommends conflict management as an integral part of effective human resource management.
This paper examines the role of loan characteristics in mortgage default probability for different mortgage lenders in the UK. The accuracy of default prediction is tested with two statistical methods, a probit model and linear discriminant analysis, using a unique dataset of defaulted commercial loan portfolios provided by sixty-six financial institutions. Both models establish that the attributes of the underlying real estate asset and the lender are significant factors in determining default probability for commercial mortgages. In addition to traditional risk factors such as loan-to-value and debt servicing coverage ratio lenders and regulators should consider loan characteristics to assess more accurately probabilities of default.
This study examined the impact of financial innovation on money demand in Nigeria, using quarterly time series for the period 2009-2019. The dependent variable was money demand, represented by broad money, while the independent variable was financial innovation represented by modern payment channels such as volume of Automated Teller Machines (ATMs) transactions, volume of Point of Sales (POS) transactions, volume of Internet banking transactions, and volume of Mobile banking transactions. The study employed the ordinary least squares (OLS) regression technique as the estimation method within the cointegration, granger causality, and error correction modeling. The result obtained showed that financial innovation has mixed impact on money demand in Nigeria during the period of analysis. For instance, financial innovation has positive impact on money demand through volume of ATM transactions in the current period, two periods lagged of volume of mobile banking transactions, current period and one period lagged of volume of internet banking transactions, and current period’s volume of Point of Sales (POS) transactions in Nigeria. On the other hand, financial innovation has negative impact on money demand through one period lagged of volume of point of sales in Nigeria. On the stability of the demand for money function, the result of the stability tests based on the CUSUM test and CUSUM of squares test showed that the demand for money function was stable during the evaluation period. The study recommended that monetary policy strategy of the central bank of Nigeria (CBN) should be fine-tuned to ensure it is well suited to deal with the challenges posed by financial innovation by way of proliferation of sophisticated payment channels.
Equity financing is one of the sources of funding available to non-bank financial institutions which is quite prevalent in developed financial markets for small or start-up firms. This study empirically determined the effect of the Equity Financing Scheme on a sustainable increase in productivity of agro-allied small businesses in Nigeria. Data for this study were elicited through the use of a questionnaire structured in a five-point likert scale. The evaluation of the relationship between the dependent and independent variables was performed using the Ordinary Least Square regression technique. The study revealed that the equity financing scheme had a positive and significant effect on the sustainable productivity of agro-allied small businesses in South-South Nigeria. The study recommended that efforts should be made to educate the small business entrepreneurs on the benefits of equity financing as a viable option towards business growth and expansion and that the government through the various intervention agencies should restructure the long-term loan policies to give access to more growth-oriented agro-allied businesses, to increase their presently low capacity to procure heavy-duty technology to increase productivity and achieve food security in Nigeria. Small business owners should take advantage of the membership of cooperative societies and as well maintain good business relationships with suppliers; this will guarantee a continuous supply of needed materials and uninterrupted operations of the business.
This study seeks to evaluate the impact of public borrowing on economic growth in Nigeria using time series data from 1980 to 2018. Specifically, the study seeks to analyze the effect of domestic debt (proxy by Federal Government Bonds-FGB) and external debt (proxy by International Monetary Fund Loan-IMFL) on Nigerian’s Gross Domestic Product (GDP). To achieve this objective, secondary data was collected from the Central Bank of Nigeria Statistical bulleting and the Debt Management Office of Nigeria. A multiple regression model involving the dependent variable (GDP) and the independent variables (FGB and IMFL) was formulated and subjected to econometric analysis. These variables were adjusted with the Jarque-bera test of normality while the correlation result was used to check the possibility of multi-collinearity among the variables. The t-test was used to answer the research questions and test the formulated hypotheses at the 5percent statistical level. Results from the analysis show that a positive relationship exists between IMF Loan and Nigeria’s gross domestic product, while a negative relationship exists between FG Bonds and Nigeria’s gross domestic product, which violates the Keynesian theory of public debt. The study concludes that both domestic and external debt significantly affect economic growth in Nigeria. Therefore, it was recommended that public borrowing should be efficiently used and contracted solely for economic reasons and not for social or political reasons as this will help to avoid accumulation of debt stock over time.
Equity investment financing is an innovative way of financing the real sector which has considerable developmental potential. The study empirically determined the effect of Equity investment financing on sustainable increase in productivity among agro-allied small businesses in South-South Nigeria. The instrument of data collection is the research questions structured in a five-point likert scale. The evaluation of the relationship between the dependent and independent variables was performed using the Ordinary Least Square regression technique. The study revealed that equity investment financing has a positive and significant effect on the sustainable productivity of businesses in Nigeria. The study recommended educating small business entrepreneurs on the benefits of equity financing as a viable option towards business growth and expansion and that the government through the various intervention agencies should restructure the long-term loan policies to give access to more growth-oriented agro-allied businesses, to increase their presently low capacity to procure heavy-duty technology to increase productivity and achieve food security in Nigeria. Small business owners should take advantage of the membership of cooperative societies and as well maintain good business relationships with suppliers; this will guarantee a continuous supply of needed materials and uninterrupted operations of the business.
This paper aims to explore the relationships of the performance of producer responsibility organizations (PROs) for waste oil, waste electrical and electronic equipment (WEEE), and end-of-life vehicles (ELV). The methodology consists in estimating the cointegration equations between the variables of lubricating oil production (SIG), electric and electronic equipment (EEE), and vehicle production (VP) using dynamic ordinary least squares (DOLS). Subsequently, elasticities are got based on estimates for Spain over the period 2007-2019 using quarterly data. The main results were that SIG and EEE were cointegrated variables. The elasticity of the SIG variable up to EEE was positive at 2, 4166. Additionally, the elasticity of the SIG variable up to VP was 2, 4050. However, SIG and VP are not cointegrated variables; subsequently, it was not a stable relationship between these variables. Results suggest it was because EPR was applied in WEEE PRO join with a deposit refund system (DRS); meanwhile, EPR in ELV PRO had been applied without subsidies to purchase cars.
In the process of R&D globalization, due to market demand and preferential policies, many multinational companies choose to invest in R&D in China. With the increase of labor costs in coastal areas and the rapid economic development of the central and western regions, multinational companies have already shifted from coastal areas to central and western regions when choosing R&D regions in China, especially in Shaanxi Province. Therefore, studying the character of R&D investment and operating performance of Multinational Corporation in Shaanxi Province has important practical significance. This article uses the data of the R&D investment of multinational corporation in the joint annual inspection of Shaanxi Province in 2018 as the sample and uses EXCEL software to conduct data analysis to gain an in-depth understanding of the character of R&D and investment of multinational corporation in Shaanxi Province, business characteristics and business performance. And it is concluded that the R&D investment of multinational corporation in Shaanxi Province has a series of characteristics such as concentration of distribution, concentration of enterprise scale, and overall good performance of operating performance.
In Bangladesh, migrant worker’s remittances constitute one of the most significant sources of external finance. This paper investigates the existence of relation between remittance inflow and GDP and the causal link between them in Bangladesh by employing the Granger causality test under a VECM framework. Using time series data over a 38 year period, we found that growth in remittances does lead to economic growth in Bangladesh. In addition to the relationship, this paper also points out some issues that are working as impediments in getting remittance and give some recommendations to overcome those impediments.
In the context of the 4.0 revolution, technology applications, especially cloud computing will have strong impacts on all areas, including accounting systems of enterprises. Cloud computing contributes to helping the enterprise accounting apparatus become compact, help automate the input process, improve the accuracy of the input data. Besides, the issur of accounting, reporting, risk control and information security also became better, contributing to improving the effectiveness of accounting. However, besides the positive impacts, businesses also face many difficulties in deploying and applying cloud computing. However, this application requirement will become an inevitable trend contributing to improving the operational efficiency of enterprises. To promote this process requires from the State as well as businesses themselves must have awareness and appropriate decisions. Breakthroughs in information technology have dramatically changed the accounting industry and the creation of financial statements. The Internet and the technologies that use the power of the Internet are playing an important role in the management and accounting activities of businesses - who always tend to be ready to receive and use public innovations technology in collecting, storing, processing and reporting information.
In recent years, Vietnam has joined international intergration by strong export agreements of bilateral and multilateral; Vietnam’s merchandise export in 1995 was only US $5.4 billion, in 2018 Vietnam’s merchandise export increased by 45 times compared to 1995 with US $244 billion. Vietnam’s imports increased by 29 times in 2018 compared to 1995. This study is an attempt to test a method of estimating the influence of exports on several Supply-sidefactors such as production value, value added and imports through the expansion of the standard system W. Leontief I.O and Miyazawa-style economic-demographic relations. This study also tries to make an experiment in the “Leontief Paradox”.The result is that Vietnam’s export value spread to production and imports but spread low to added value, especially in the processing industry group’s fabrication. The study is based on the non-competitive I.O table in 2012 and 2018 with 16 sectors.
The profitability of commercial banks is influenced by a number of internal and external factors. This paper attempts to identify the internal factors which significantly influence the profitability of commercial banks in Bangladesh. In this study, profitability is measured by ROA and ROE which may be significantly influenced by the internal factors such as IRS, NIM, CAR, CR, DG, LD, CTI and SIZE of the bank. Data are collected from published annual reports during 2014--2018 of 23 commercial banks. Using simple regression model, it is found that CR has significant effect on the profitability and CAR has significant influence on ROA only. In addition to this, DG has significant effects on PCBs’ profitability (ROE only) where as IRS and CTI have significant influence on profitability (ROA only) of ICBs. Further, none of these variables have significant effects on the profitability of SCBs but CAR and CR are correlated with profitability (ROA only) and the causes may be the nature of services provided by SCBs to its clients. The internal policy makers should manage the influential internal factors of the banks in order to increase their profitability so that they can meet stakeholders’ expectations.
Using a series of econometric techniques, the study analysed interaction between monetary policy and private sector credit in Ghana. This study made use of monthly dataset spanning January 1999 to December 2019 of credit to the private sector (PSC) and broad money supply (M2). The results reveal that there exists cointegration, a long run stationary relation between monetary policy and private sector credit. This implies, increases in credit should prompt long-term increases in monetary policy. It is not surprising that growth in the private sector might have a stronger effect on monetary policy. The Error Correction Test is statistically significant and that all the variables demonstrate similar adjustment speeds. This implies that in the short run, both money supply and credit are somewhat equally responsive to their last period’s equilibrium error. There is unidirectional causation from private sector credit to monetary policy. It can be said that, there is an interaction between money supply and private sector credit. Thus, credit to private sector holds great potential in promoting economic growth. It can be recommended to the government to increase the credit flow to the private sector because of its strategic importance in creating and generating growth of the economy.
This paper investigates if forecasting models based on Machine Learning (ML) Algorithms are capable to predict intraday prices in the small, frontier stock market of Romania. The results show that this is indeed the case. Moreover, the prediction accuracy of the various models improves as the forecasting horizon increases. Overall, ML forecasting models are superior to the passive buy and hold strategy, as well as to a naïve strategy that always predicts the last known price action will continue. However, we also show that this superior predictive ability cannot be converted into “abnormal”, economically significant profits after considering transaction costs. This implies that intraday stock prices incorporate information within the accepted bounds of weak-form market efficiency, and cannot be “timed” even by sophisticated investors equipped with state of the art ML prediction models.
Applying the Arrow-Debreu-Mundell-Fleming model as an economic standard model, with combining axiological framework and epistemological model, it is proposed to analyze economic policies with using a synthetic model, where interest, exchange and tax rates are integrated together. Except normal monetary and fiscal policies mainly via interest and tax rates, there are feasible ways to utilize modified strategies via exchange and tax rates. When ones need to simulate national local market, ones can raise the exchange rate. Otherwise, when ones need to promote international global trade, ones may lower the exchange rate. It is found that tax reduction is good policy when tax rate is higher than normal and that tax increase is good social policy when tax rate is lower than normal, during economic depression. Also it is revealed that tax reduction is good social policy when tax rate is lower than normal, and that tax increase is good policy when tax rate is higher than normal, during economic overheat. While economic system seeks efficiency and social system pursues equality, common interest modifications with elastic exchange and tax rates could be applied for balancing efficiency and equality.
In recent times, agricultural sector has returned to the forefront of development issues in Nigeria given its contribution to employment creation, sustainable food supply and provision of raw materials to other sectors of the economy. In lieu of that, this study examines the impact of agriculture on the economic growth in Nigeria using annual time series data covering the sample period of 1981 to 2018. To analyse the data collected, Autoregression Distributed Lag (ARDL) model through the bounds testing framework is employed to measure the presence of cointegrating relations between real GDP, agricultural productivity, labour force, and agricultural export. Results show the presence of both short-run and long-run relationship among the variables, and that agriculture has a positive and significant impact on economic growth in Nigeria. These findings inform the Nigerian government on the need to expedite labour force (human capital) and agricultural export (non-oil) development with the view to achieving sustainable growth and development. In addition, developing skills and competencies of labour force through capacity building in the agricultural sector will encourage research and development thereby increase the export size, hence essential for long-term growth.
The article illustrates the results of the economic development of the first fifteen years of the XXI century under the conditions of unprecedented economic freedom, globalization and the appearance of new informational sectors up to and including the first attempts at revising liberalism. The analysis of statistical data demonstrates an obvious increase in the percentage of well-off people in many countries as well as the increased economic capabilities of small, medium and large businesses, whose assets are distributed among an ever-increasing number of owners. This provides the impetus to review our collective approach to liberalization and globalization, as well as to view its unexpected strong sides that make human progress possible.
This paper investigates the relationship between working capital management and financial performance of Pharmaceuticals and Textile firms listed at the Dhaka Securities Exchange in Bangladesh. The data analysis was carried on ten Pharmaceuticals and Textile firms for a period of 2013 to 2017. Secondary Data was analyzed by applying Descriptive Statistics, Regression and Correlation analysis to findthe relationship of current ratio, inventory conversion period and average payment period with Return on Asset. The findings indicate that the Pharmaceuticals and Textile firms’ performance is influenced by the variables relating to working capital. There is a positive relationship between profitability and current ratioand Inventory Turnover period shows a negative relationship with profitability but Average payment period shows insignificant impact on profitability. The study concludes that there exists a relationship between working capital managementand financial performance of Pharmaceuticals and Textile firms in Bangladesh. The study recommends that for the Pharmaceuticals and Textile firms to remain profitable, they should employ working capital management practice that will help in making decisions about investment mix and policy, matching investment to objective, asset allocation for institution and balancing risk against profitability.
Organizational behaviour involves the design of work as well as the psychological, emotional and interpersonal behavioural dynamics that influence organizational performance. Management as a discipline concerned with the study of overseeing activities and supervising people to perform specific tasks is crucial in organizational behaviour and corporate effectiveness. Management emphasizes the design, implementation and arrangement of various administrative and organizational systems for corporate effectiveness. While the individuals, and groups bring their skills, knowledge, values, motives, and attitudes into the organization, and thereby influencing it, the organization, on the other hand, modifies or restructures the individuals and groups through its structure, culture, policies, politics, power, and procedures, and the roles expected to be played by the people in the organization. This study conducted through the exploratory research design involved 125 participants, and result showed strong positive relationship between the variables of interest. The study was never exhaustive due to limitations in terms of time and current relevant literature, therefore, further study could examine the relationship between personality characteristics and performance in the public sector, where productivity is not outstanding, when compared with the private sector. Based on the result of this investigation it was recommended that organizations should provide emotional intelligence programmes for their membership as an important pattern of increasing co-operative behaviours and corporate effectiveness.
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Exchange Rate Dynamics: The Overshooting Model (With Sticky Prices)
1. International Journal of Economics and Financial Research
ISSN(e): 2411-9407, ISSN(p): 2413-8533
Vol. 4, Issue. 2, pp: 38-45, 2018
URL: http://arpgweb.com/?ic=journal&journal=5&info=aims
Academic Research Publishing
Group
38
Original Research Open Access
Exchange Rate Dynamics: The Overshooting Model (With Sticky Prices)
Ioannis N. Kallianiotis
Economics/Finance Department the Arthur J. Kania School of Management University of Scranton Scranton, PA 18510-4602 U.S.A
Abstract
The objective of this paper is to test the exchange rate dynamics by measuring the speed of adjustment of prices. In
this overshooting model, we assume price stickiness (gradual adjustment). If the prices are adjusted instantaneously,
we will have the monetarist view; otherwise, the overshooting one, due to slow adjustment of prices and
consequently, it affects all the other variables and slowly the exchange rate. We outline, here, an approach of testing
the dynamic models of exchange rate determination. This approach is based upon the idea that it is difficult to
measure directly the process by which market participants revise their expectations about current and future money
supplies. On the other hand, it is possible to make indirect inferences about these expectations through a time series
analysis of related financial and real prices. Empirical tests of the above exchange rate dynamics are taking place for
four different exchange rates ($/€, $/£, C$/$, and ¥/$). Theoretical discussion and empirical evidence have
emphasized the impact of gradual adjustment and “overshooting” that it is taking place. Only for the $/€ exchange
rate the monetarist model is correct.
Keywords: Demand for Money and Exchange Rate Foreign Exchange Forecasting and Simulation Information and Market
Efficiency International Financial Markets.
CC BY: Creative Commons Attribution License 4.0
1. Introduction
The Monetarist model, Bilson (1978), assumes instantaneous adjustment in all markets. An important
modification was set forth by Dornbusch (1976), who assumed that asset markets adjust instantaneously, where
prices in goods markets adjust slowly (gradually). The resulting exchange rate dynamics model retains all the long
run equilibrium or steady state properties of the monetary approach, but in the short run, the real exchange rate and
the interest rate can diverge from their long run levels. Then, the monetary policy can have effects on real variables
(production) in the system. Thus, exchange rate dynamics or “overshooting” can occur in any model, in which some
markets do not adjust instantaneously.
This sticky price version is a Keynesian model of the monetary approach. Purchasing power parity (
*
ttt psp
) may be a good approximation in the long run, but it does not hold in the short run. There are long term contracts,
imperfect information, high cost of acquiring information, inertia in consumer habits, price control in some
countries, the uncertainty about the future economy that the effective lower bound ( e
FFi ) has created,1
and other
restrictions, which do not allow prices to change instantaneously, but adjust gradually. This gives us a model of
exchange rate determination, in which changes in the nominal money supply ( s
M ) are also changes in the real
money supply (
P
M
P
M ss
) because prices are sticky, so the effect is real, as follows:
MandXSKiPD
P
M
P
M
RSoutflowBondsBonds
ss
)($
In the short run, because prices are sticky ( P ), a nominal monetary expansion ( s
M ) has an increase in real
money (purchasing power,
P
M s
), which increases the demand for bonds ( BondsD ) and the prices of
bonds are increasing ( BondsP ) that has a liquidity effect. Thus, the interest rate falls ( i ), generating an incipient
capital outflow ( outflowK ), which causes the currency to depreciate instantaneously ( RSS ) more than it will in
the long run, which stimulate exports ( X ) and discourages imports ( M ), as shown in Figure 1. The currency
1
The federal funds rate ( FFi ) was between 0% and 0.25% for eight years, since December 2008, by the Fed and the effective (
e
FFi ) closed to
zero. Consumers and firms reduced demand and supply of products because the Fed policy had increased their uncertainty for the future outcomes
of the economy. This policy had no effect on output and employment, but it has affected prices, due to enormous liquidity and has generated a
new bubble. The DJIA from 6,547.05 (3/9/2009) reached 26,616.71 (1/26/2018), a growth of 306.55% in 8.83 years (34.72% p.a.). The last few
days, it has lost over 500 points; the bubble is losing air. See, Plante et al. (2017). Fed’s Effective Lower Bound Constraint on Monetary Policy
Created Uncertainty. Economic Letter, Dallas Fed, 12(11): 1-4. Also, official inflation rate ( = 1.6% p.a.) and the SGS one ( = 6%). See,
http://www.usinflationcalculator.com/inflation/current-inflation-rates/ . And
http://www.shadowstats.com/alternate_data/inflation-charts
2. International Journal of Economics and Financial Research
39
depreciates just enough, so that the rationally expected rate of future appreciation precisely cancels out the interest
differential. This is known as “overshooting” of the spot exchange rate.
The overshooting results are consistent with perfect foresight. The assumptions of the model are that goods’
prices are sticky (price inertia in the short run), prices of currencies are flexible, arbitrage in asset markets holds
[uncovered interest parity (UIP)], and expectations of exchange rate changes are rational. Initial shocks are
unanticipated, but when they occur, overshooting clears the way for a time path of the domestic interest rate and the
exchange rate that is consistent with perfect foresight on the part of market participants. Given that an unanticipated
increase in the domestic money supply in period 1t would temporarily lower the domestic interest rate (liquidity
effect), expectations of currency appreciation are necessary in order to induce individuals to continue to hold
domestic securities and money.
When a monetary shock occurs in period 1t (unanticipated increase in the money supply); the market will adjust
to a new equilibrium, which will be between prices and quantities. Due to price stickiness in the goods market, the
short run equilibrium will be achieved through shifts in financial market prices. As prices of goods increase
gradually toward the new equilibrium in period 2t , the foreign exchange continuous re-pricing approaching its long
term equilibrium level. Then, a new long run equilibrium will be attained in the domestic money, currency exchange,
and goods markets. As a result, the exchange rate will initially overreact (overshoot), due to a monetary shock. Over
time, goods prices will respond, allowing the foreign exchange rate to restrain its overreaction and the economy will
reach its new long run equilibrium in all markets in period 2t (Figure 1).2
Figure-1. The Overshooting Model (Exchange Rate Dynamics)
Note: tm = money supply, ti = interest rate, ty = real output (production), tp = price level, and ts = spot exchange rate.
iPD
P
M
PM BondsBonds
s
s
)( capital outflows currency depreciates instantaneously more than it will in
the long-term.
2. The Theoretical Model
The overshooting model can be presented with the following equations:
The money demand function,
ttttt iypm (1)
where, tm = demand for money, tp = the (sticky) price level, = the constant term, ty = the real income, and
ti = the short-term interest rate; variables are in natural logarithms ( MMMm sd
t lnlnln ).
The uncovered interest parity,
t
e
t
e
ttt sssii 1
*
(2)
where, ti = the domestic short-term interest rate, *
ti = the foreign short-term interest rate, e
ts = expected change
of the spot exchange rate, e
ts 1 = expected spot rate next period, and ts = current actual spot rate; and an asterisk ( *
)
means foreign variable.
2
See, Kallianiotis,(2013a)
3. International Journal of Economics and Financial Research
40
The long-run PPP,
*
ttt pps (3)
The bars (i.e., p ) over the variables mean that the relationship holds in the long run.
The long run monetarist exchange rate equation,
t
e
t
e
tttttt ppyymms )()()( ***
(4)
We assume that expectations are rational and the system is stable. Income growth is exogenous [random with
0)( ygE ] and monetary growth follows a random walk. Thus, the relative money supply and, in the long run, the
relative price level and exchange rate, are all rationally expected to follow paths that increase at the current rate of
relative money growth ( *
* ttmm mmorgg
tt
).
Then, equation (4) becomes,
tmmttttt tt
ggyymms )()()( *
**
(5)
In the short run, when the exchange rate deviates from its equilibrium path, it is expected to close that gap with a
speed of adjustment of (theta). In the long run, when the exchange rate lies on its equilibrium path, it is expected
to increase at ( *
tt mm gg ).
*)(
tt mmtt
e
t ggsss (6)
By combining (6) with (2), we obtain,
*)(*
tt mmtttt ggssii (7)
and putting the growth of money equal to the expected inflation,
e
t
e
tmm tt
gg *
* (8)
we have,
)]()[(
1 ** e
tt
e
tttt iiss
(9)
Equation (9) shows that the gap between the exchange rate and its equilibrium value is proportional to the real
interest rate differential. When a tight domestic monetary policy causes the interest differential to rise above its
equilibrium level, an incipient capital inflow causes the value of the domestic currency to rise (spot rate falls)
proportionately above its equilibrium level.
Now, by combining eq. (5), which represents the long run monetary equilibrium path, with eq. (9), representing
the short run overshooting effect, we can obtain a general monetary equation of exchange rate determination,
t
e
tt
e
tttt iiss
)]()[(
1 **
(10)
and
t
e
tt
e
ttmmttttt iiggyymms
tt
)]()[(
1
)()()( ****
* (11)
Equation (11) is an expansion of the monetarist equation with the addition of the fourth variable, the real interest
differential between the two countries. If the monetarist model is correct, the last variable must have a coefficient of
zero, which means that the speed of adjustment ( ) is infinite. By considering that the level of the money supply,
rather than the change in the money supply, is a random walk; the expected long run inflation differential ( e
t
e
t
*
)
is zero.
Equation (11) becomes,
tttttttt iiyymms
)(
1
)()( ***
(12)
The above equation (12) is the Dornbusch equation, which can be tested econometrically by estimating eq. (11).
A question remains, here; whether or not the domestic and foreign bonds are perfect substitutes. The violation of this
assumption means that the interest differential will differ from the expected rate of currency depreciation. This
difference may arise due to transaction costs, expectation errors or a risk premium, as most financial analysts
consider being the case.
Assuming that the real rate of interest is the same in the two countries (
*
tt rr ), eq. (12) becomes,
t
e
t
e
tttttt yymms
)(
1
)()( ***
(13)
Equation (13) is an equation that can also be tested by using eq. (14), an expansion of the monetarist equation, to
determine the speed of adjustment of prices ( ), which will prove to us what model is correct, the monetarist (
) or the overshooting ( ).
4. International Journal of Economics and Financial Research
41
t
e
t
e
tmmttttt tt
ggyymms
)(
1
)()()( ***
* (14)
Equation (14) is an expansion of the monetarist equation with the addition of the fourth variable, the expected
inflation differential between the two countries
3. Data and Empirical Results
The data are monthly and are coming from Economagic.com, Eurostat, and Bloomberg. For the euro (€), the
data are from 1999:01 to 2017:01 and for the other four currencies ($, £, C$, and ¥) from 1971:01 to 2017:01. Other
data, beyond the four exchange rates ($/€, $/£, C$/$, and ¥/$) used, here, are T-Bill rates, money supplies, incomes,
and price levels (CPIs). An empirical test of the overshooting and monetarist model is taking place, which will give
the dynamics of exchange rates. Recent tests for the $/€ exchange rate conducted by (Kallianiotis (2013a)) show that
the evidence are supporting the overshooting model.3
The implication of these empirical findings is that the market
oriented economies have an instantaneous price adjustment ( ) and some less market oriented ones have a
gradual adjustment of their prices ( ), as it was expected; thus, prices are not a monetary phenomenon
everywhere, but a cost-push (speculation, profit maximization, lack of competition) process (supply side inflation).
We start forecasting the
e
tˆ for the five economies and the results are presented in Table 1.
3
Equation (11) is tested to see whether the monetarist or the overshooting model is correct. First, the equation is running as it is in the theory.
96,242.0,826.0,559.0
)044.0()401.1()036.0()337.0(
)]()[(273.0)(396.0)(397.0)(258.3
2
*************
*
NWDSSRR
iiggyymms e
tt
e
ttmmttttt tt
The coefficient 0
1
, reveals that the speed of adjustment is small ( 663.3 ). The highest the theta ( ), the highest the speed of
adjustment of prices. But, the statistics show a high serial correlation of the error term ( 2WD ) and a correction must take place by using
some )(qMA processes.
96,857.1,082.0,956.0
)081.0()156.0()154.0()079.0(
672.0183.1684.1697.1
)022.0()232.0()031.0()407.0(
)]()[(043.0)(232.1)(225.0)(319.2
2
4
***
3
***
2
***
1
***
***************
*
NWDSSRR
iiggyymms
tttt
e
tt
e
ttmmttttt tt
The above equation shows that the results are unbiased and the last term (the real interest differential) is statistically significant (at the 5%
level) different than zero ( 253.23043.0
1
). Then, the speed of adjustment ( ) is finite and the Monetarist model is not
correct. The empirical results show that we have gradual adjustment of prices and “overshooting” is taking place. See, Kallianiotis, J. N.,
Exchange Rates and International Financial Economics: History, Theories, and Practices.
5. International Journal of Economics and Financial Research
42
Table-1. Forecasting Inflation Rates
e
tˆ with an ARMA (p, q) Process
e
tˆ (U.S.)
e
t
*
ˆ (EMU)
e
t
*
ˆ (U.K.)
e
t
*
ˆ (Canada)
e
t
*
ˆ (Japan)
c 4.651***
4.541***
3.588***
3.962***
4.596***
(0.697) (0.099) (1.037) (0.491) 0.033)
1t 1.995***
0.996***
1.996***
1.998***
1.237***
(0.001) (0.011) (0.001) (0.001) (0.067)
2t -0.994***
- -0.996***
-0.998***
-0.240***
(0.01) (0.001) (0.001) (0.067)
1t -0.553***
- -0.782***
-0.926***
-
(0.028) (0.038) (0.017)
2t -0.308***
- -0.127***
- -0.202***
(0.029) (0.039) (0.065)
2
R 0.999 0.989 0.999 0.999 0.970
SSR 0.004 0.011 0.011 0.004 0.004
F 3,787,968 11,838.99 1,541,234 2,773,330 2,512.773
WD 1.924 1.935 1.990 1.924 1.985
N 555 267 540 554 312
Note:
2
R = R-squared, SSR = sum of squared residuals, F = F-Statistic, WD = Durbin-Watson Statistic,
N = number of observations,
***
= significant at the 1% level,
**
= significant at the 5% level, and
*
= significant
at the 10% level.
Source: Economagic.com, Bloomberg, and Eurostat.
Then, we estimate eq. (11) to determine the speed of adjustment ( ) and it is shown in Table 2a. For the $/€
exchange rate, the 0001.0
1
(statistically insignificant); then, , the monetarist model is correct. The
$/£ exchange rate has 037.0
1
(statistically significant at the 1% level), which gives a 816.26 ; there is
overshooting, here (the monetarist model is not correct). Then, the C$/$ exchange rate gives 020.0
1
(significant at the 1% level) and 033.51 , which shows overshooting of exchange rate. Lastly, the ¥/$
exchange rate has a 025.0
1
(statistically significant at the 1% level) and its 390.39 ; thus, the monetarist
model is not correct, overshooting takes place.
Table-2a. Estimation of the Overshooting Model, Eq. (11)
t
e
tt
e
ttmmttttt iiggyymms
tt
)]()[(
1
)()()( ****
*
1 2
R SSR F WD N
$/€ -1.317***
0.182***
0.001 0.001 0.177 4.020 - 0.040 204
(0.200) (0.027) (0.001) (0.001)
$/£ 0.063***
0.246***
-0.001 -0.037***
0.159 2.118 - 0.077 311
(0.017) (0.027) (0.001) (0.004)
C$/$ 0.490***
-0.408***
-0.001 0.020***
0.600 2.788 - 0.040 428
(0.020) (0.021) (0.001) (0.003)
¥/$ -0.761***
1.059***
-0.001 0.025***
0.320 3.533 - 0.059 258
(0.015) (0.060) (0.001) (0.006)
Note: See, Table 1.
Source: See, Table 1.
Now, we run eq. (11) by correcting the serial correlation of the error term and the results are given in Table 2b.
For the $/€ exchange rate 0013.0
1
(statistically insignificant); thus, and we have instantaneous
adjustment of prices (no overshooting, but monetarist model is
6. International Journal of Economics and Financial Research
43
Table-2b. Estimation of the Overshooting Model, Eq. (11), with Correction of Serial Correlation
t
e
tt
e
ttmmttttt iiggyymms
tt
)]()[(
1
)()()( ****
*
$/€ $/£ C$/$ ¥/$
-0.873***
0.135***
0.447***
-0.791***
(0.225) (0.026) (0.025) (0.022)
0.143***
0.147***
-
0.373***
0.929***
(0.016) (0.045) (0.026) (0.090)
0.001***
0.001 -
0.001***
0.001
(0.001) (0.001) (0.001) (0.001)
1 -0.013 -0.020***
0.004*
0.018**
(0.008) (0.004) (0.002) (0.008)
1t 1.549***
1.325***
1.448***
1.383***
(0.063) (0.059) (0.035) (0.065)
2t 1.727***
1.270***
1.715***
1.590***
(0.109) (0.084) (0.066) (0.096)
3t 1.397***
1.216***
1.462***
1.587***
(0.092) (0.077) (0.110)
4t 0.826***
1.045***
0.909***
1.396***
(0.117) (0.096) (0.072) (0.119)
5t 0.240***
0.708***
0.373***
0.886***
(0.070) (0.083) (0.049) (0.107)
6t - 0.292***
- 0.409***
(0.057) (0.066)
2
R 0.949 0.935 0.976 0.962
SSR 0.247 0.165 0.168 0.195
F - - - -
WD 1.798 1.817 1.771 1.850
N 204 311 428 258
Note: See, Table 1.
Source: See, Table 1.
correct). For the $/£, the 020.0
1
(statistically significant at 1% level) and 687.50 , the monetarist model
is not correct, there is overshooting, here. The C$/$ exchange rate gives 004.0
1
(significant at the 10% level)
and 384.268 , which shows a relatively high speed of adjustment, but not instantaneous (overshooting still
holds). Finally, the ¥/$ exchange rate shows 018.0
1
(significant at the 5% level), which gives a 658.55
and the monetarist model is not correct, there is overshooting.
Further, we estimate eq. (14) to test if there is price inertia and the results are presented in Table 3a. Starting
with $/€ exchange rate, 0001.0
1
(statistically insignificant); then, and no price inertia takes place.
The $/£ exchange rate has an 0001.0
1
(insignificant); then, and the monetarist model is correct.
The C$/$ gives 013.0
1
(statistically significant at the 1% level); so, 923.76 , which shows that there is
overshooting. Lastly, the ¥/$ exchange rate has 0001.0
1
(statistically insignificant); then, ,
instantaneous price adjustment.
7. International Journal of Economics and Financial Research
44
Table-3a. Estimation of the Overshooting Model, Eq. (14)
t
e
t
e
tmmttttt tt
ggyymms
)(
1
)()()( ***
*
1 2
R SSR F WD N
$/€ -1.311***
0.181***
0.001 0.001 0.177 4.020 - 0.040 204
(0.168) (0.012) (0.001) (0.003)
$/£ 0.194***
0.198 -0.001 -0.001 0.111 2.799 - 0.067 311
(0.013) (0.198) (0.001) (0.001)
C$/$ .524***
-0.458***
0.001 0.013***
0.600 2.786 - 0.140 429
(0.022) (0.023) (0.001) (0.002) -
¥/$ -0.840***
0.751***
-0.001 -0.001 0.352 4.501 0.065 309
(0.007) (0.031) (0.001) (0.003)
Note: See, Table 1.
Source: See, Table 1.
Finally, we correct eq. (14) for the serial correlation of the error term and the results are shown in Table 3b. The
0001.0
1
(statistically insignificant) for the $/€, $/£, and ¥/$ exchange rates; thus, , which shows
that the speed of adjustment of prices is infinite. For C$/$ exchange rate, 0001.0
1
(statistically significant at
5% level; then, 000,1 , which means overshooting (a small price inertia exists).
Table- 3b. Estimation of the Overshooting Model, Eq. (14), with Correction of Serial Correlation
t
e
t
e
tmmttttt tt
ggyymms
)(
1
)()()( ***
*
$/€ $/£ C$/$ ¥/$
-0.945***
0.205***
0.472***
-0.874***
(0.217) (0.024) (0.024) (0.009)
0.157***
-0.029 -0.402***
0.582***
(0.017) (0.141) (0.026) (0.043)
0.001**
0.001 -0.001***
0.001
(0.001) (0.001) (0.001) (0.001)
1 0.001 0.001 0.001**
0.001
(0.001) (0.001) (0.001) (0.001)
1t 1.359***
1.416***
1.320***
1.382***
(0.063) (0.056) (0.030) (0.051)
2t 1.428***
1.397***
1.525***
1.607***
(0.094) (0.087) (0.051) (0.078)
3t 1.320***
1.300***
1.464***
1.567***
(0.116) (0.098) (0.066) (0.089)
4t 1.216***
1.145***
1.210***
1.353***
(0.125) (0.102) (0.070) (0.096)
5t 0.878 ***
0.759***
0.813***
0.917***
(0.107) (0.088) (0.064) (0.087)
6t 0.500***
0.312***
0.396***
0.414***
(0.063) (0.056) (0.039) (0.058)
2
R 0.959 0.931 0.979 0.962
SSR 0.198 0.174 0.145 0.264
F - - - -
WD 1.687 1.798 1.716 1.842
N 204 311 429 309
Note: See, Table 1.
Source: See, Table 1.
8. International Journal of Economics and Financial Research
45
4. Conclusion
The purpose of this research has been to outline an approach to the testing of dynamic models of exchange rate
determination. This approach is based upon the idea that it is difficult to measure directly the process by which
market participants revise their expectations about current and future money supplies. On the other hand, it is
possible to make indirect inferences about these expectations through a time series analysis of related financial and
real variables. Dornbusch (1976) assumed that asset markets adjust instantaneously, whereas prices in goods markets
adjust gradually (slowly). This exchange rate dynamics model retains all the long run equilibrium or steady state
properties of the monetary approach, but in the short run the exchange rate and the interest rate can diverge from
their long run levels, so monetary policy can have effects on real variables (production) in the system. Lately,
uncertainty has increased because the Fed had reduced the federal funds rate to zero and the economy had not been
stabilized; but, prices were expected to change, due to this enormous liquidity.
In an empirical test of the process to the Dornbusch model of exchange rate dynamics by using eq. (11), it was
shown that the monetarist model is correct for the dollar/euro ($/€) exchange rate ( ), which means that prices
are adjusted instantaneously in the U.S. and Euro-zone economies. For the other three exchange rates ($/£, C$/$, and
¥/$), the overshooting takes place (gradual adjustment of prices). The speed of adjustment of prices for the C$/$
exchange rate is relatively high ( 384.268 ). It follows by the ¥/$ exchange rate ( 658.55 ), which shows
relatively price stickiness. Lastly, the $/£ exchange rate has a speed of price adjustment ( 687.50 ), which
shows that prices are adjusted very gradually (there is price inertia). Thus, the monetarist model does not hold for
these three exchange rates; these exchange rates are overshooting in the short-run. By using eq. (14), only the C$/$
exchange rate shows price inertia (overshooting); the other three exchange rates show instantaneous price adjustment
(monetarist model is correct). Thus, results are mixed, here, so more research is needed to evaluate the two models,
monetarist and overshooting.
References
Bilson, J. (1978). Rational expectations and the exchange rate”, in The economics of exchange rates, edited by J.
Frenkel and H.G. Johnson, Reading MA: Addison-Wesley.
Dornbusch, R. (1976). Expectations and exchange rate dynamics. Journal of Political Economy, 84(6): 1161-76.
Kallianiotis, J. N. (2013a). Exchange rates and international financial economics: History, theories, and practices.
Palgrave MacMillan: New York.
Plante, M., Alexander, W., Richter and Nathaniel, A. T. (2017). Fed’s effective lower bound constraint on monetary
policy created uncertainty. Economic Letter, Dallas Fed, 12(11): 1-4.