Monetary Model of Exchange Rate: Empirical Evidence from Malawi

Simwaka, Kisu

doi:10.2139/ssrn.569322

Cited by 5 publications

(5 citation statements)

References 6 publications

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“…This model emerged as a prominent exchange rate model after the breakdown of the Bretton Woods System in 1973. However, the empirical evidence surrounding the monetary exchange rate model are often inconsistent and sometimes contradictory (Simwaka, 2004). As this model is developed based on the money demand foundation, the model is very much dependent on the assumption of a stable money demand function (Bissoondeeal et al, 2009).…”

Section: Introductionmentioning

confidence: 99%

The Impact of Divisia Money on Monetary Model of Exchange Rate in Indonesia

Leong¹,

Puah²,

Liew³

2018

Economics &Amp; Sociology

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Stability of the exchange rate is critical for policy formulation in Indonesia and thus, has boosted the study of exchange rate behaviour. In this study, the monetary model of exchange rate has been utilised to determine the exchange rate for Indonesia. The model was improved by means of including the Divisia monetary aggregate as the money measure instead of conventional money supply. The ARDL approach, which was valid in spite of the variables' stationary properties, was used for the estimation. The findings indicated that monetary fundamentals are significant in explaining the exchange rate movements in Indonesia when Divisia money was incorporated into the monetary model of the exchange rate. As a result, monetary fundamentals can serve as the determinants of exchange rate in addition to non-monetary fundamentals in the case of Indonesia. High magnitude of the money supply differential and the real income differential coefficients also implied that monetary targeting can serve as a useful instrument for monetary policy in addition to inflation targeting. The research is based on the data ranging from 1984Q1 to 2017Q1.

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Section: Introductionmentioning

confidence: 99%

The Impact of Divisia Money on Monetary Model of Exchange Rate in Indonesia

Leong¹,

Puah²,

Liew³

2018

Economics &Amp; Sociology

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“…The outcome of the Johansen cointegration test for the number of cointegrating equations has been endorsed by the ARDL bound testing approach in the case of all three exchange rates which proves that cointegration results are consistent with rigor and cointegration analysis is a reliable strategy to explain long run and short-run behavior of exchange rate as endorsed by (Simwaka, 2004).…”

Section: Resultsmentioning

confidence: 78%

“…In an academic investigation for Ukraine, (Boyko, 2002) where 'dollarization' was inducted, a modified version of flexible price monetary models has provided the evidence for exchange rate determination with a large impact on domestic nominal deposit (interest) rate, dollarization ratio, domestic money supply on nominal exchange rates in contrast to foreign fundamentals. The evidence from the research department of the Reserve Bank of Malawi successfully applied Johansen's cointegration on Malawi Kwacha-US dollar exchange rates and observed a valid relationship between unrestricted monetary models and the nominal exchange rates (Simwaka, 2004). A study regarding developing countries refused the validity of monetary models because of the insignificant effect of domestic money supply on the exchange rate determination (Jegajeevan, 2011).…”

Section: Review Of Literaturementioning

confidence: 99%

Do Monetary Models Really Matter to Determine the Exchange Rate Behavior: A Case for Pakistan

2022

Forman J. Econ. Stud

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This study attempts to investigate whether monetary models of exchange rates are contributing at the same pace to determine the exchange rates across countries, or whether their role has been changed through the development process. Since the ‘money demand’ and ‘purchasing power parity are two major elements of these models suggesting a linear association of monetary models with exchange rate fundamentals, therefore, to capture the expected long-run relationship across these models is assessed by applying the cointegration technique. Three main currencies based exchange rates of Pakistan are evaluated within the context of monetary models including the US dollar, Euro, and Chinese Yuan. A sample of monthly data for the period 1957 to 2020 has been analyzed. The results show a weak long run relationship in the case of the Chinese Yuan-based exchange rate; however, in the short-run monetary models are significantly contributing to determining the real (nominal) exchange rate in the case of all three based currencies. Whereas in the case of both Euro and US dollar-based exchange rates the relationship is strongly evident both in the long and short runs. Chinese Yuan appears to be preferred over both US Dollar and Euro for international payments and a major share in foreign exchange reserves.

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“…The reason for this is the difficulty of explaining and forecasting exchange rates based on macroeconomic fundamentals. Empirical tests of the models are often ambiguous and sometimes even contradictory (Simwaka 2004). The monetary model of exchange rates attempts to explain the exchange rate through macroeconomics fundamentals.…”

Section: Is Outhern African Business Review Volume 20 2016mentioning

confidence: 99%

A re-examination of the exchange rate overshooting hypothesis: Evidence from Zambia

Chiliba¹,

Alagidede

Schaling

2019

SABR

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2Dornbusch’s exchange rate overshooting hypothesis has guided monetary policy conduct for many years, despite the fact that empirical evidence on its validity is mixed. This study re-examines the validity of the overshooting hypothesis by using the autoregressive distributed lag (ARDL) procedure. Specifically, the study investigates whether the overshooting hypothesis holds for the United States dollar/Zambian kwacha (USD-ZMK) exchange rate. In addition, the study tests whether there is a long-run equilibrium relationship between the USD-ZMK exchange rate and relevant macroeconomic fundamentals. Using monthly nominal USD/ZMK exchange rates and monetary fundamentals data from January 2000 to December 2012, the study finds no evidence of exchange rate overshooting. The results also show that there is no long-run equilibrium relationship between the exchange rate and the differentials of macroeconomic fundamentals. The implication is that macroeconomic fundamentals are insignificant in determining the exchange rate fluctuations in the long run. This finding is inconsistent with the monetary model of exchange rate determination, which asserts that there is a long-run relationship between the exchange rate and macroeconomic fundamentals.

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Monetary Model of Exchange Rate: Empirical Evidence from Malawi

Cited by 5 publications

References 6 publications

The Impact of Divisia Money on Monetary Model of Exchange Rate in Indonesia

The Impact of Divisia Money on Monetary Model of Exchange Rate in Indonesia

Do Monetary Models Really Matter to Determine the Exchange Rate Behavior: A Case for Pakistan

A re-examination of the exchange rate overshooting hypothesis: Evidence from Zambia

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