Abstract
A country's inflation rate and exchange rate forms a two-way relationship, whereby the former can affect the latter and vice versa. However, past researches have proven that the exchange rate affects inflation to a lesser extent. Thus, we choose to study the behaviour of exchange rate in response to inflation. While Malaysia has a relatively constant inflation rate for the past 35 years, without exceeding 10 percent, Vietnam's inflation rate is significantly higher with great fluctuations in the same duration. With this large difference in inflation rates, it would be interesting to study the affect onto the movement of the VND/MYR exchange rate. Besides observing the relationship, we are predicting the 2015 exchange rate based on historical data. This is done by fitting the data to two prediction models, the Purchasing Power Parity model and the Autoregressive model, and evaluating the most appropriate and accurate model. We found that the best prediction model is the Autoregressive model and proceeded to generate the forecasted exchange rate.
Published Version
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