Search results

This paper aims to examine the relationship between Indian rupee-US dollar exchange rate and the macroeconomic fundamentals for the post-economic reform period.

The authors have used an empirical model which includes a range of important macroeconomic variables based on the basic monetary theories of exchange rate determination. At the first stage of the analysis, they have tested structural break in the data. Subsequently, they have employed the fully modified ordinary least square, Wald’s coefficient restriction and impulse response functions (IRF) to estimate the monetary model in the long- and short-run horizons.

Results of analyses indicate that the macroeconomic fundamentals determine exchange rate in a significant way, but their effect varies sizably across the periods. The IRF illustrate the importance of interest rate in controlling exchange rate volatility.

The analysis of the behavior of inter-relationship among macroeconomic variables will help policymakers in a deep-rooted understanding of this complex and time-varying relationship.

Most of the existing studies have tested the impact of a single or a few macroeconomic fundamentals on exchange rate. But in the present study, we have tested the impact of a range of important variables, i.e. money supply, real income or output, price level and trade balance. Further, considering the importance of structural breaks in data, they authors have employed standard tests of structural break and incorporated the issue in the cointegration analysis.

The unstable money demand function over the recent decades may explain the unsatisfactory performance of the exchange rate model. Numerous studies have shown that Divisia money serves as a better variable for a stable money demand function. In this study, Divisia money is used as an alternative money supply in MYR/USD exchange rate determination. This study finds that Divisia money differential, real income differential, relative short-term interest rate and real stock prices affect the MYR/USD exchange rate in the long run. The major implication of this study is that policy-makers could monitor the MYR/USD exchange rate via the money supplies following the principle of Divisia monetary aggregate, which assigns higher weightage to more frequently traded monetary assets.

The sticky-price monetary model of exchange rate states the overshooting hypothesis as, exchange rate depreciation beyond its long-term value in response to an increase in money supply owing to the sticky nature of prices. Because of interest and relevance to policy, there is a huge extant literature on it but with mixed findings that suggest the need for further studies to refine the findings. Pakistan’s rupee exchange rate against the US dollar depreciated 128.44% over the period May 2007–December 2018. Considering this substantial decline in rupee's value, this study aims to examine either the rupee short-run value is over-shot of its long-term value.

This study uses a linear ARDL approach that segregates the short-run and long-run effects thus clarifying the premise of exchange rate overshooting. Furthermore, this study also uses nonlinear ARDL as a robustness check incorporating structural breaks.

Findings based on a linear model show evidence of exchange rate undershooting that means a positive money shock causes the exchange rate to appreciate. A nonlinear analysis also provides support to these findings. However, the increase in relative money supply has more such effect than that of a decrease in the relative money supply. Moreover, the authorities’ inclination to stabilize the exchange rate appreciates its short-run value.

This study substantiates the overshooting hypothesis literature by considering the role of asymmetric effects of exchange rate determinants and structural breaks that is a rare attempt in the extant literature.

The purpose of this paper is to present an empirical analysis of long-run and short-run forcing variables of purchasing power parity (PPP) for ASEAN-5 currencies vis-à-vis the UK pound, i.e. their real effective exchange rate (REER).

This study uses a recently developed autoregressive distributed lag (ARDL) approach to co-integration (Pesaran et al., 2001) over the period 1991:Q1-2006:Q2. Our empirical results suggest that the foreign interest rate (R*) and domestic money supply (M1) are the significant long-run forcing variables of PPP for ASEAN-5 REERs for the three periods.

In the short-run, the variables have different impacts during the sub-periods and full period for ASEAN-5 countries. The results suggest that the domestic money supply (M1) for Malaysia, domestic interest rate and foreign interest rate (R*) for Indonesia, domestic money supply (M1) and term of trades (TOT) for Philippines, foreign interest rate (R*) for Thailand, and foreign interest rate (R*) and net foreign assets (NFA) for Singapore, respectively, have the highest significant short-run forcing variable of PPP for countries REERs.

In this respect, the outcomes can derive policy implication for the monetary authorities in these ASEAN-5 countries.

This paper seeks to characterize the behavior of the naira/dollar foreign exchange rate series over the period 1999 through 2006 to determine if the process generating the series has long memory which is a special case of fractional Brownian motion. The existence of long memory contradicts the notion of market efficiency.

The paper employs the modified rescaled range R/S test which is proposed by Lo to test the null hypothesis that daily and weekly NGN/USD exchange rates from 1999 through 2006 exhibit short‐memory process. The second test that was also employed is the Geweke‐Porter‐Hubak (GPH) test which was refined by Hurvich et al.

The results show that long memory is present in daily and weekly foreign exchange level series of the Nigerian naira for the period sampled. This evidence implies that the Nigerian foreign exchange market may not be efficient. Thus, it is possible for investors to realize abnormal profit by taking an investment position based on predicted exchange rates. The results reported in this paper are also indicative of a deviation from long‐run PPP.

This paper is the first to empirically apply the modified R/S and GPH tests to explore the existence of long‐memory process in a country study of foreign exchange series using data from Nigeria.

The purpose of the paper is to examine the linkages between exchange rate and interest rate in India using quarterly data from Q1 of 1996 to Q4 of 2014.

Stationarity properties of data are checked using the Augmented Dickey–Fuller (ADF), Dickey–Fuller test with GLS de-trending (DF-GLS) and Kwiatkowski-Phillips-Schmidt-Shin (KPSS) tests and Perron’s unit root test with structural breaks. Johansen Juselius and Gregory Hansen tests are applied to assess cointegration, and block exogeneity test is used to detect causality among variables.

The study finds long-run relationship among interest rate, rupee–dollar exchange rate, capital flows, intervention, inflation differential, money supply differentials, output differentials and trade-balance differentials. However, the interest rate does not explain movements in the exchange rate, directly and indirectly, via capital flows. Intervention by the Central Banks to stabilize exchange rate does not have implications for movements in interest rate.

The study finds capital flows to be insensitive with respect to interest rates and hence thwarts International Monetary Fund ’s (IMF) claim of using interest rates as a tool to stabilize exchange rate. The much-debated conflict between exchange-rate stabilization and control over interest rates also does not hold up to the empirical reality of India.

The study augments the existing literature by taking into account the problem of structural break in the relationship between interest rate and exchange rate. Three measures of interest rate are used to assess the robustness of results adding to their credibility compared to previous studies.

The purpose of this paper is to analyse the long-run relationship between geopolitical risk and exchange rates in four ASEAN countries.

We 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.

Our 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.

There 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.

This 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.