Money demand instability and real exchange rate persistence in the monetary model of USD–JPY exchange rate

This paper proposes a hybrid monetary model of the dollar–yen exchange rate that takes into account factors affecting the conventional monetary model's building blocks. In particular, the hybrid monetary model is based on the incorporation of real stock prices to enhance money demand stability and also, productivity differential, relative government spending, and real oil price to explain real exchange rate persistence. By using quarterly data over a period of high international capital mobility and volatility (1980:01–2009:04), the results show that the proposed hybrid model provides a coherent long-run relation to explain the dollar–yen exchange rate as opposed to the conventional monetary model.     

Determinants and Forecast of Price Level in India: a VAR Framework

The theoretical association of money supply and exchange rates with prices has been empirically established and shown to be dominant in explaining changes in price levels in India. However, post liberalisation, studies have shown price levels to be impacted by several other factors as also, weakened influence of the traditional factors established by theories. This study aims to find the determinants of price level for the period 1994–2008 using a Vector Autoregression model and test the predictive ability of the model. Our results show shorter and smaller impact of change in money supply and nominal effective exchange rate on price levels. Both money supply and nominal effective exchange rates are found to Granger-cause Consumer Price Index. But, impulse response functions show that the impact of shocks from money supply and nominal effective exchange rates on consumer prices peaks after two lags and is short-lived. Forecast error variance decomposition shows that these demand side factors contribute only 6 % of the forecast error variation in Consumer Price Index.

     

The effects of macroeconomic factors on South African agriculture

Significant research efforts have been devoted to understanding the effects of macroeconomic factors on the agriculture sector. Analysing the sources of volatility in the industry is critical for designing appropriate policies to stabilize agricultural markets, reduce poverty and increase economic growth. Agriculture is a competitive sector with prices that are more flexible than those in nonagricultural sectors. This article uses annual data over the 1957–2004 period and a vector error-correction model in investigating the dynamic effects of exchange rates, money supply and other macroeconomic variables on the agricultural sector in South Africa. Overall, real exchange rates, interest rates, inflation and money supply (M3) shocks have significant and persistent impacts on agricultural output, prices received by farmers and farm input prices. M3 and interest rate shocks tend to put agriculture in a cost-price squeeze. Agricultural price movements are a source of macroeconomic instability in the country. Real exchange rate shocks shift relative prices in favour of agriculture in the long-run, thereby, boosting farm incomes and accelerating poverty reduction in the country.     

Stock prices and long-run demand for money: evidence from Malaysia

This paper investigates the money demand function for Malaysia in the 1971-1996 period using the multivariate cointegration and error correction model methodology. The results suggest that a stable long-run relationship exist between real M2, the interest rate differential, income and stock prices. Stock prices have a significant negative substitute effect on long-run as well as short-run broad-money demand (M2) and its omission can lead to serious misspecification in the money demand function. The analysis from the vector error correction model (VECM) and the Toda & Yamamoto (1995) causality tests find that money is endogenous and that there is at least a unidirectional relationship between stock prices and real M2. Stock prices Granger cause real M2 indirectly through income between interest rates and stock prices and stock prices and money stock. This paper comes to the conclusion that due to the endogeneity of money, M2 cannot be completely controlled by Malaysia's central bank. Therefore, in formulating future monetary policy, the response of money demand to stock prices should be considered.     

The demand for money in an open economy: the United Kingdom

Most previous studies have estimated the demand for money without paying too much attention to developments in the foreign exchange markets. In light of the fact that any development abroad and in the foreign exchange markets could have implications for domestic stabilization, we make an attempt to incorporate such developments into the demand for money in the United Kingdom. More precisely, after incorporating a measure of real effective exchange rate of the British Pound into a dynamic money demand function, we estimated it for the UK using quarterly data over 1973–87 period. By relying upon the Akaike' Final Prediction Error criteria to select the optimum number of lags, it is shown that in addition to income and interest rate, the real effective exchange rate exerts significant effect on the UK demand for money in the short run as well as long run.     

The impact of oil prices on income and energy

The major determinant of real income growth in Korea is real oil prices, followed by money supply, exchange rates, energy consumption, and government spending. Over the longer horizon, the effects of exchange rates, oil prices, government spending, and money supply become more pronounced. For energy consumption, the most important factor is oil prices, followed by exchange rates, government spending, money supply, and income. For the association between energy consumption and real income, energy consumption influences real income growth only through energy consumption, while real income affects energy consumption only through the error correction term. The findings of the study thus suggest that the level of economic activity and energy consumption mutually influence each other.     

实际汇率变动对商品国内价格的影响研究

本文从理论与实证两方面对实际汇率以及汇率波动性的变动对中国出口商品国内价格的影响进行了研究。理论分析强调了汇率对出口商品国内价格的影响方向取决于商品的需求价格弹性。对我国1990—2002年共12种商品平行数据的实证分析说明了汇率波动性增加可能导致部分初级产品国内价格水平的下降。全文分析强调了实际汇率波动性对国内商品价格的影响。     

Money Demand and Purchasing Power Parity (PPP), in the Republic of South Africa

We have examined empirically two important economic relationships, the Purchasing Power Parity (PPP) and the money demand relationship, among the consumer prices, money, output, interest rates, and the nominal rand/dollar exchange rate of the Republic of South Africa (RSA) for the sample period from 1993 second quarter to 2003 second quarter within the frameworks of co-integration and Error Correction Model (ECM). It is established that the strong version of the PPP including the proportionality and the symmetry hypothesis, is supported. The changes in the rand/dollar exchange rates are influenced by the long term trends in the consumer prices of the RSA and the USA. There also exists a well defined money demand function for this period. The broad money demand is influenced by the consumer prices, the GDP and the interest rates. The short-term interest rates are found to be the own rate of return for broad money and the long-term bond yield is the opportunity cost of holding money. The monetary policy works through the short term interest rates.

     

Financial Factors and the Empirical Behavior of Money Demand: A Case Study of Malaysia

The paper analyses the roles of financial factors in the behavior of M1 and M2 demands for Malaysia. The focus is on the possible changes in the elasticities of the M1 and M2 money demands in the environment of financial innovations and on the influence of real stock prices on the holdings of monetary assets. Our results reinforce existing studies that find the presence of the long-run M1 and M2 money demands and structural instability in the dynamic specification of the M1 demand. However, we are able to identify stable error-correction model for the post-1986 M1 demand and for the M2 demand. Our results also indicate the reduction in the Long run income and exchange rate elasticities of the money demands. Meanwhile, the interest rate sensitivity of the demands becomes more inelastic. Lastly, we document the significance of real stock prices in influencing the demand behavior, indicating the dominance of the wealth effect over the substitution effect. [E41, E44]     

Stochastic and structural fiscal policy in a monetary stationary economy

In the framework of a monetary asset pricing model which is simple enough to generate closed form formulae for equilibrium price functions the interactions between output, fiscal policy, and asset markets is investigated. With money yielding liquidity services in the exchange process real stock prices are negatively correlated with anticipated (stochastic) fiscal policy changes, while the impact of unanticipated (structural) fiscal policy on the stock market depends qualitatively on the ‘business cycle’ of the economy. It is shown that the monetary character of the economy, more precisely the role of money in the exchange process, is critical for the relationship between fiscal policy and real share prices. Moreover, while contingent fiscal policy measures may be successful in stabilizing the real interest rate on money they are incapable of achieving a stable term structure of the real rate on stocks. In contrast, uncontingently higher public expenditures generally promote the volatility of the real rates on financial assets.     

Does money have a role in the inflation process? Evidence from Australia

Inflation, defined as a sustained increase in the price level, is considered a monetary phenomenon, as it can be explained within the framework of money‐demand and money‐supply relationships. In the extant literature, money growth is shown to remain causally related to inflation across countries and over time, irrespective of the exchange rate regime and stability of the money‐demand function. Nevertheless, emerging literature suggests a diminishing role of money in the conduct of monetary policy for price stability, especially under inflation targeting. Monetary policy in Australia under inflation targeting since 1993 is an example of policy that denies a relationship between money growth and inflation. The proposition that money does not matter insofar as inflation is concerned seems odd in both theory and the best‐practice monetary policy for price stability. This paper uses annual data for the period 1970–2017 and quarterly data for the period 1970Q1–2015Q1. It deploys both the Johansen cointegration approach and the autoregressive distributed lag (ARDL) cointegration approach to investigate for Australia whether money, real output, prices and the exchange rate (non‐stationary variables) maintain the long‐run price‐level relationship that the classical monetary theory suggests in the presence of such stationary variables as the domestic and foreign interest rates. As expected, the empirical findings for Australia are consistent with the classical long‐run price‐level relationship between money, real output, prices and the exchange rate. The error‐correction model of inflation confirms the presence of a cointegral relationship among these variables; it also provides strong evidence of a short‐run causal relationship between money supply growth and inflation. On the basis of a priori theoretical predictions and empirical findings, the paper draws the conclusion that the monetary aggregate and its growth rate matter insofar as inflation is concerned, irrespective of the strategy of monetary policy for price stability.     

The demand for money and the real exchange rate misalignments in emerging European countries: A nonlinear approach

This paper investigates the extent to which domestic and foreign money balances in emerging European countries are influenced by foreign exchange considerations. A well-specified and stable relationship between real money demand and the exchange rate can be perceived as an important part of a successful monetary policy. This study examines the long-run determinants of real exchange rates (RERs) associated with the behavioral equilibrium exchange rate (BEER) approach and identifies currency misalignments in these countries. The misalignment is later used to test the nonlinear behavior of the demand for money. The results indicate that the RER misalignments have a significant impact on domestic money demand. When the currencies are overvalued, there is a reduction in domestic money demand, and when they are undervalued, there is an increase in domestic money demand. Furthermore, it can be concluded that overvaluation causes an increase in foreign money demand indicating a shift of preference from domestic to foreign currency.     

Exchange rate volatility and international trade: International evidence from the MINT countries

This paper examines the effect of exchange rate volatility on international trade volumes for Mexico, Indonesia, Nigeria, and Turkey. We use volatility predicted from GARCH models for both nominal and real effective exchange rate data. To detect the long-term relationship we use the autoregressive distributed lag (ARDL) bound testing approach, while for the short-term effects, Granger causality models are employed. The results show that, in the long term, there is no linkage between exchange rate volatility and international trade activities except for Turkey, and even in this case, the magnitude of the effect of volatility is quite small. In the short term, however, a significant causal relationship from volatility to import/export demand is detected for Indonesia and Mexico. In the case of Nigeria, unidirectional causality from export demand to volatility is found, while for Turkey, no causality between volatility and import/export demand is detected.     

Economic Uncertainty,Monetary Uncertainty,and the Demand for Money: Evidence From Asian Countries

In 1984 Nobel Lauriat Milton Friedman claimed that the decline in velocity of money or an increase in the demand for money was due to volatility of money supply. Another study argued that if monetary volatility could impact the demand for money, so can output volatility (as a measure of economic uncertainty). Both measures of uncertainty can cause people to reallocate their assets between cash and real assets that are less risky. If public become more cautious about the future, they will hold more cash today. However, if they chose to hedge against uncertain prices, they may hold more real assets and less cash. These two hypotheses are tested for Asian countries using bounds testing approach. While both measures are found to have short‐run significant effects on the demand for money in almost all countries, the short‐run effects last into the long run in half of the countries. Furthermore, we find positive and negative effects of both measures which are in line with previous research related to a few developed countries.     

The London Business School econometric model of the UK

This paper describes the London Business School econometric model — the first fully computerized model of the UK — which has been used for regular public forecasting since 1966. The model, estimated on quarterly data, is organized around the income expenditure accounts with a fully integrated flow of funds sector which ensures consistency between portfolio decisions and income, savings and investment decisions. Aggregate demand is built up from its individual components so that demand influences are important for the short- and medium-term behaviour of the model. But there are important supply-side effects which work through the real exchange rate and real wages. Monetary conditions have a powerfull effect on the model through the exchange rate, personal sector wealth and interest rates. Wages and employment are determined in a labour market in which employment decisions depend on the level of demand and real wages while real wages depend on the level of unemployment, real benefits and direct and indirect taxes as well as underlying trends in productivity. Asset prices move in any period to clear both the spot and the future market in assets so that current asset prices in the equity, gilt-edged and foreign exchange markets reflect all current information about the expected state of the economy. In contrast, goods prices adjust sluggishly. The combination of continuously clearing asset markets and sluggish wages and prices gives the model many of the theoretical characteristics associated with the open-economy models of Dornbusch and Buiter and Miller.     

The Tale of Three Amigos: Remittances, Exchange Rates, and Money Demand in Mexico

The author analyzes the relationship between remittances, exchange rates, and money demand in Mexico. He finds that shocks to remittances have a positive impact on domestic money demand. The results also suggest the existence of a bi-directional relationship between remittances and the exchange rate. Furthermore, positive shocks to remittances are found to have a negative impact on Mexico's real exchange rate. This indicates that remittances appreciate the Mexican peso and therefore may impact on the competitiveness of the tradable sector negatively.     

Interaction between oil and US dollar exchange rate: nonlinear causality,time-varying influence and structural breaks in volatility

This article examines the nonlinear Granger causality and time-varying influence between crude oil prices and the US dollar (USD) exchange rate using the Hiemstra and Jones (HP) test, the Diks and Panchenko (DP) test and the time-varying parameter structural vector autoregression model. By applying the iterated cumulative sums of squares (ICSS) algorithm and the DCC-GARCH model, the effects of structural breaks in volatility of the two markets are also investigated. The empirical analysis indicates that, first, crude oil prices are the nonlinear Granger-cause of the USD exchange rate, but not vice versa. Second, the USD exchange rate exerts a stronger and more stable negative influence on crude oil prices in the short term, and the influence gradually weakens after 2012. Finally, ignoring structural breaks can increase the negative volatility correlation between the oil and USD exchange rate markets, which is particularly remarkable during the financial crisis.     

Exchange rate volatility and United Kingdom trade: evidence from Canada,Japan and New Zealand

This paper investigates the influence of exchange rate volatility on the real imports of the United Kingdom from Canada, Japan and New Zealand during the period 1980–2003. The Johansen multivariate cointegration method and the constrained error correction (general-to-specific) method are applied to study the relationship between real imports and its determinants (including exchange rate volatility). Conditional variance from the GARCH(1,1) model is applied as exchange rate volatility. Both nominal and real exchange rates are employed in the empirical study. Results indicate a significant effect of the exchange rate volatility on real imports. These exchange rate volatility effects are mostly positive. The author thanks an anonymous referee, the editor and Myles Wallace for several useful comments and suggestions. Any remaining errors and omissions are the author’s responsibility alone.     

人民币汇率波动与货币政策调控难度

文章采用动态随机一般均衡（DSGE）模型研究了中国货币政策实施时不能忽略的人民币汇率波动特征。文章构建了人民币汇率波动与中国货币政策及其宏观经济系统影响机制的理论模型,并在模型参数校准的基础上进行了政策模拟。研究结果表明,较大的人民币汇率波动会在一定程度上减弱中国货币政策的调控效果,但是对每个变量冲击响应的影响程度有所不同。较大的人民币汇率波动将显著干扰货币政策对宏观经济需求的调控,人民币汇率升值波动幅度较大时,货币政策对需求变量的调控作用会减弱,但不会影响相关需求变量在不同时点的冲击响应走势特征。较大的汇率波动会减弱利率上行对出口的负面影响,有利于缓解货币政策对出口的负面冲击,但会导致贸易条件（出口价格和进口价格的比值）进一步恶化。     

Autoregressive conditional durations: An application to the Surinamese dollar versus the US dollar exchange rate

The parallel market nominal exchange rate of the United States dollar vis-à-vis the Surinamese dollar (USD/SRD) exhibited periods of severe volatility which were often followed by episodes of stability, usually at a cost of sharp depreciations. This study seeks to model this exchange rate using autoregressive conditional duration models. These models are suitable for modelling events occurring with irregular intervals. Exchange rates in developing countries have distinct features compared to exchange rates in countries with well-established and accessible financial markets. A key feature is that for these developing countries, exchange rates only occasionally experience jumps. Our findings suggest that past exchange rate changes appear to be a significant driver of future exchange rate jumps. Furthermore, our results show that money, international reserves, and commodity prices can explain jumps in the market USD/SRD exchange rate.