Domestic Money Supply Research Articles

Asymmetric and Nonlinear Foreign Debt–Inflation Nexus in Brazil: Evidence from NARDL and Markov Regime Switching Approaches

This paper augments the sparse literature on the inflationary impact of foreign debt in Brazil while addressing methodological caveats in previous studies. We depart from the linearity assumption and employ two nonlinear techniques: the nonlinear autoregressive distributed lag (NARDL) model and a Markov Switching Regression (MSR) to investigate the connection between foreign debt and inflation within a multivariate framework. The analyses consider the presence of structural breaks via assessing variable stationarity using the Zivot and Andrew unit root test and incorporating a residual-based cointegration test proposed by Gregory and Hansen. Additionally, we apply a multiple structural breakpoints test by Bai and Perron to determine the presence of structural breaks in the impact of foreign debt on inflation. Our findings robustly indicate that the domestic money supply has a statistically significant positive effect, while the nominal effective exchange rate has a negative effect on inflation in both the short and long run. The NARDL model reveals that only positive changes in foreign debt have a statistically significant negative effect on inflation in the short run, whereas both positive and negative foreign debt changes significantly affect inflation in the long run. The results from the MSR model are generally consistent with those of the NARDL model.

Deficit financing and Macroeconomic Performance: the Nigeria experience

Due to the mixed order of integration, the study uses the ARDL model to examine the relationship between deficit financing and the performance of the macroeconomy proxy by GDP in Nigeria over a thirty-year period, from 1990 to 2019. In the model, the inflation rate, the government's fiscal deficit, and the domestic money supply served as stand-ins for deficit financing. And the outcome demonstrates that while the model satisfied the sufficient condition of stability, it failed the necessary condition due to an explosive divergence indicator. Additionally, the variables have a long-term relationship, and based on estimates from the long-run equation, all of the variables have a significant impact on the economy, with the domestic money supply having a positive effect and inflation and the government fiscal deficit having a negative impact.

Does external debt drive inflation in Sudan: evidence from symmetric and asymmetric ARDL approaches

PurposeThis study aims to examine the symmetric and asymmetric impact of external debt on inflation in Sudan from 1970 to 2020 within a multivariate framework by including money supply and the nominal effective exchange rate as additional inflation determinants.Design/methodology/approachThe authors utilize an Auto Regressive Distributed Lag (ARDL) model to examine the symmetric impact of external debt on inflation, while the asymmetric impact is examined using a Nonlinear ARDL (NARDL) model. The existence of a long-run relationship between inflation and external debt is tested using the bounds-testing approach to cointegration, and a vector error-correction model is estimated to determine the short parameters of equilibrium dynamics.FindingsThe linear ARDL model results show that external debt has no statistically significant impact on inflation in the long run. On the contrary, the results of the NARDL model show that positive and negative external debt shocks statistically affect inflation in the long run. The estimated long-run elasticity coefficients of the linear and nonlinear ARDL models reveal that the domestic money supply has a statistically significant positive impact on inflation. In contrast, the nominal effective exchange rate has a statistically significant negative impact on inflation.Practical implicationsThe reliance on symmetric analysis may not be sufficient to uncover the existence of a linkage between external debt and inflation. Proper external debt management is crucial to control inflation rates in Sudan.Originality/valueTo date, no empirical study has assessed the external debt-inflation nexus and its potential asymmetry in Sudan, and the current study aims to fill this gap in the literature.

Endogenous money supply, global liquidity and financial transactions: Panel evidence from OECD countries

Research background: Endogenous money creation is an inherent feature of today?s economies and widely accepted phenomenon. As the various theories of money rely on the money quantity equation, most empirical research is heading towards the analysis of the two-way relationship between the quantity of money and nominal GDP. In today's world, with the extraordinary development of the financial sector, money is used not only for transactions in the real economy, but increasingly also for purchasing financial assets. This observation was absorbed by Werner in the quantity theory of disaggregated credit. Purpose of the article: The aim of the paper is to join the debate on endogenous character of money supply by tasting a disaggregated equation of money. It assumes that the domestic money supply is positively determined not only by growth in GDP-based transactions but also by growth in non-GDP-based transactions (financial transactions). Additionally, it is assumed that in the age of globalization it can be also positively influenced by the global liquidity. Methods: Testing of the above-mentioned hypotheses takes place with the use of panel unit roots tests, panel Granger causality test and panel estimations (OLS, models with fixed/random effects, GMM). In the study, annual data from 2002 to 2018 for OECD countries were chosen for statistical research. Findings & value added: The article confirms the hypothesis that real and financial economic activity together with global liquidity positively influence domestic credit and thus money supply. As the amount of money in an economy is driven not only by the real economy but also by the financial economy, prudential regulations that restrict leverage (and thus control the amount of credit) and limit risk-taking during price bubbles periods should be therefore considered. In the research, the reaction of domestic money supply to the changes in US money supply is positive. It confirms the importance of spill-over effect of expansionary policy in major economies to other economies.

The Effects of Currency Devaluation on the Bilateral Trade Balance of Sudan: Cointegration and Error-Correction Modeling

The purpose of this research paper is to investigate the effects of exchange rate, income and money supply on the trade balance of Sudan over a fifty-year period from 1970 to 2020. The empirical model for this investigation is developed using a cointegration approach and error-correction technique to specifically examine the effects of currency devaluation on the trade balance of Sudan with its major partners. The bounds test shows that the variables of interest are bound together in the long-run. The associated equilibrium correction is significant, thus confirming the existence of a long-run relationship. Moreover, to analyze the dynamic interactions of the variables included in the estimated model, variance decomposition is employed. The study results from the variance decomposition show that innovations in foreign income contribute highly to the forecast error variance of the trade balance compared with other explanatory variables in the short-run. In contrast, the domestic money supply contributes highly to the trade balance compared with other variables in the long-run. A key finding of the study suggests that the devaluation of Sudan’s currency is not an appropriate step toward improving the country's trade balance position.

Money, exchange rate and export quality

This paper theoretically examines the effect of an expansionary monetary policy on export quality and its ramifications on the aggregate employment of the unskilled workers in a competitive general equilibrium framework of a small open economy. Monetary policies are often pursued by the central bank of an economy to manage exchange rate fluctuations under a managed float regime, which may have adverse consequences for export-quality choices and thereby for export growth given the growing preference of buyers in richer nations for higher qualities of imports. Under optimal allocation of wealth over a portfolio of cash, domestic assets and foreign assets, we show that an increase in the domestic money supply affects the choice of export-quality through larger investment, capital formation and consequent endowment effect and through changes in the nominal exchange rate. Under less price-elastic demand for a non-traded good, export quality is upgraded when quality upgrading is relatively capital (than skill) intensive. The expansionary monetary policy may raise aggregate employment of unskilled workers due to larger investment and capital formation, but may lower it through changes in the quality of the export good. The overall effect is thus ambiguous. A larger initial size of bequests has a similar effect.

Taking Money Seriously and Putting it Back into the Feldstein-Horioka Saving-Investment Nexus

Theoretically based on national income accounting identities, the Feldstein-Horioka hypothesis downplays, if not totally ignores, the influence of monetary factors on international capital mobility. Recognizing the historical development of economics and the institutional arrangements of the exchange rate regime, this study extends the theoretical framework by integrating the balance of payments and national income accounting equations to show that domestic investment is related to not only domestic saving and international capital flows but also changes in the domestic money supply and credit creation. Panel data regression results for the original Feldstein-Horioka sample – 20 OECD countries over the years 1960 – 1974 – empirically support the theory. In contrast to the Feldstein-Horioka findings, a lower saving-investment coefficient is found, suggesting higher international capital mobility though still with some degree of home bias. Overall, this study illustrates the importance of money, history of economics and economic institutions in understanding and resolving the Feldstein-Horioka puzzle.

US Fiscal Stimulus and Value of Dollar

Our study examines the impact of government stimulus spending on the US dollar’s exchange rate. We apply the VECM model on US data from 1980 to 2020 with US dollar’s exchange rate as the dependent variable and the quantity of domestic money supply, amount of domestic government purchases, quantity of money supplied by the foreign country (China), and the foreign country’s output as independent variables. Our study finds that, while the long-run impact of US fiscal stimulus spending on the dollar’s exchange rate is negative, it has no effect in the short run. Also, the coefficient associated with the error￾correction term, ECT, is negative but insignificant at 5% significance level, which implies that any short￾term fluctuation in the US dollar’s exchange rate will not be adjusted toward its long-run value.

The effect of exchange rate volatility on economic growth

This study aimed to investigate the connection between exchange rate volatility and economic growth in Ghana. The study applied descriptive statistical analysis, regression analysis, and correlation analysis to analyze the data spanning from the year 2000 to 2020. The study discovered that the actual exchange rate exhibits clustering volatility, which means that a period of large (small) fluctuations in the exchange rate shock is followed by large (small) fluctuations over a longer time. Negative correlations were found between exchange rate volatility and trade openness, government expenditure, money supply, foreign direct investment (FDI), output, and domestic credit to the private sector, among others. It was determined that exogenous variables such as terms of trade, domestic money supply, government expenditure, and capital flows affected exchange rate volatility over the long term, which was consistent with the findings of other studies (Rasheed, Ishaq, & Malik, 2022; Barguellil, Ben-Salha, & Zmami, 2018). The study also indicated that exchange rate volatility had a negative effect on economic growth. In all, most of the effects are felt at the end rather than in the short run. The government should encourage the diversification of industries by encouraging industrialization to boost export as a way of offsetting our huge imports. There must be a tightening of the monetary policy through raising interest rates to keep inflation at bay.

ЛИНЕЙНАЯ ДИНАМИЧЕСКАЯ МОДЕЛЬ ОБМЕНА В КОЛИЧЕСТВЕННОЙ ТЕОРИИ ДЕНЕГ

The linear dynamic exchange model in the quantitative theory of money is presented and substantiated. This model reflects the relationship of macroeconomic indicators such as real gross domestic product (GDP) and real money supply (RMS). The model is built under the assumption that GDP is a function of the RDM and this function does not explicitly depend on time. The solution of the differential equation of the model shows that the RDM should change exponentially. To quantitatively reflect the relationship of the studied macroeconomic indicators, it is proposed to use a logarithmic dependence, which corresponds to linear graphs in the corresponding coordinates. The established relationship between GDP and RMS is in good agreement with empirical data obtained on the basis of both Russian and foreign economic statistics. The proposed dynamic exchange model can be used in the formation of monetary policy. It allows you to determine the target for the required RMS growth, depending on the target for GDP growth.

ANALYSING THE EXCHANGE RATE-INFLATION NEXUS: EVIDENCE FROM MAURITIUS

This paper examines the degree and speed of exchange rate passthrough (ERPT) to the inflation rate in Mauritius from 1980 to 2016 using dynamics regression analysis. Results reveal that the long-run ERPT elasticity to domestic inflation is incomplete and low. However, no such relationship is discovered in the short run. The speed of adjustment of actual inflation to its long-run equilibrium level is quite high and it takes approximately two years to attain that level. From a policy point of view, domestic inflation can be tamed by tightening the domestic money supply and maintaining exchange rate stability in the long run

The Application of Additive Seasonal Model in the Analysis of Domestic Credit Scale

To establish statistical model of measurement, this paper analyses the five major domestic economic data whether impact on domestic credit amount, for the purpose of the data cointegration test to eliminate the spurious regression result in error, and through the OLS regression estimate and error correction model is established for dynamic balance of feedback in the short term, then use VAR impulse response function to feedback the long-term dynamic equilibrium, the last three parameters exponential smoothing model is set up to predict the future scale of the credit. According to the conclusion, the total domestic credit scale is a series with cycle fluctuation, seasonal effect and long-term trend. Domestic money supply and domestic fiscal revenue are the main factors affecting the scale of domestic credit. In other words, the fluctuation of domestic credit model tends to return to the normal level, which is balanced and restricted by the medium and long term stable co-integration relationship of the model. To absorb the impact of domestic fiscal revenue or an increase in the domestic money supply, banks adjust for changes in the size of credit, and then show little change. In the short term, the two variables significantly affect the credit scale, but the long-term impact is not significant. Under the condition of constant economic environment, it will still show a steady rise in the future, and the trend of annual cycle is increasing month by month.

DIGITAL RUBLE ISSUE

The state economies of our time are faced with the urgent task of developing innovative campaigns to address issues of digital financial asset management. This trend is caused by the development of technological systems for providing financial services and products on the world market. The proposed instrument for regulating digital banking is the integration into the domestic economy of a new form of money - the digital currency of the central bank (digital ruble). The purpose of the study is to form an idea about the issue of digital financial assets and, as a result, to develop an effective way to introduce digital financial assets "digital ruble" into the domestic financial infrastructure. The shortcomings of the existing domestic legislation regarding the regulation of exchange processes and regulation of the turnover of digital financial assets are revealed. The concepts of "issue of digital financial assets", "digital ruble" are disclosed. The processes of issuing the digital ruble, the planned turnover in the domestic financial system, the possibility of converting digital financial assets being introduced into cash and non-cash money are considered. The position of the digital ruble in the structure of the domestic money supply is determined. Potential problems in the economic system in the process of integrating the digital ruble into it are noted. The processes of pricing and fixing the value of digital financial assets are considered. The analysis of the issue of digital financial assets showed a technical flaw and a general limitation in the functionality of the digital ruble, which is supposed to be integrated.

A Descriptive Analysis of Trade and Balance of Payment in Kenya

Kenya’s current account for quite over a long time has experienced deterioration and hence reflecting a deficit. This worsening in the current account balance is as a result of high growth in import merchandise bill relative to export merchandise hence the import-export gap has continued to worsen, the high continuous rise of inflation rate and overall slow economic growth in Kenya. It is however despite the deterioration Kenya marked some significant surpluses the current accounts within the period for some years that is 1977 and 2003. In 1977 the surplus was attributed to the coffee boom and in 2003 it was attributed to decline in imports as receipts from exports increased. The performance of BOP is influenced by a number of factors which among others include; trade balance, terms of trade, competitiveness, domestic money supply, exchange rate, fiscal deficit, economic growth rate, domestic capital formation, inflation rate, net foreign direct investment, capital market, remittances and loans.

COVID-19 Pandemi Döneminde Enflasyonun Belirleyicileri: Avrupa Ülkeleri Üzerine Bir Mekansal Panel Veri Analizi

Aim: The recent macroeconomic problems in the global economy are highly related to the coronavirus disease 2019 (COVID-19) pandemic. Since the highest spread of the disease is observed in the European countries, it is worthwhile to investigate the macroeconomic indicators in the European Union (EU) member and the candidate countries. Inflation is one of the most important indicators to examine since it may directly affect many macroeconomic variables. In this study, the determinants of inflation in the 28 EU members and candidate states are investigated.
 Material and Methods: In this study, the determinants of inflation in the 28 EU members and candidate states are investigated for January 2020-July 2020 using spatial panel data analysis.
 Results: The empirical results indicated that the exchange rate and money supply ratios were reasons of the increase in inflation. There is also increasing pressure on the inflation rates due to the domestic money supply and exchange rate variables as well as the neighborhood relations between countries (positive spatial effects).
 Conclusion: It is an important finding that macroeconomic problems in each sample country are also affected by developments in neighboring countries as well as internal dynamics. Continuous development of economic, social, and political cooperation between neighboring countries at the regional level is essential. It is reasonable for every country to develop self-sufficient strategies in the fields of agriculture, food, technology, and pharmaceutical industries in case of global disasters. Regional cooperation should not be limited to the development of sectors that stand out during the pandemic period.

The Impact of United States of America-China Trade War on Market Capitalization of Emerging Economies

This article evaluates the impact of United States of America (USA)–China trade war on market capitalization of emerging economies. A major determinant of growth in emerging economies is market capitalization, which is the share price times the number of shares outstanding for listed domestic companies. Empirical literature suggests that the development of stock market hence market capitalization is affected by macroeconomic variables such as interest rate, exchange rate, gross domestic product, current account and money supply. Using a panel vector error correction model with USA tariffs as a proxy for trade war, this article proves that USA–China trade war has a negative impact on market capitalization of the emerging markets. Interest rates, exchange rates and trade balance have a positive impact on market capitalization of emerging markets. This article recommends that emerging economies manage interest rates, exchange rates and trade balances in order to offset the negative impact of the USA–China trade war.

Efficiency of Sterilization Policies by the State Bank of Vietnam

This study aims to evaluate the effectiveness of sterilization in Vietnam. We estimate a simultaneous equation by using Two-Stage least squares (2SLS) regression analysis. The time-series data was collected for the first quarter of 2004 to the fourth quarter of 2018. In particular, the effectiveness of sterilization is considered in terms of dollarized economy, since making the transition from a centrally planned to a market economy system, the Vietnamese economy has remained in a state of dollarization. In addition, we also assess whether the global financial crisis had an impact on the sterilization effectiveness of the State Bank of Vietnam (SBV). On the basis of the estimated sterilization and offset coefficients, our results suggest that the State Bank of Vietnam (SBV) has not been able to fully neutralize the impact on the domestic money supply when intervening in the foreign exchange market, and the capital inflows respond strongly to changes in domestic monetary conditions. The results also show that the global financial crisis has changed the effectiveness of these sterilization policies. An analysis of this study's empirical findings provides the opportunity to derive some recommendations that may assist in increasing the effectiveness of the State Bank of Vietnam's sterilization policies in the process of accumulating international reserves.

Another Look at Devaluation and the Trade Balance in China

This paper estimates the effect of Chinese Yuan devaluation on the trade balance of China. For that a regression equation is developed in which domestic income, foreign income, domestic money supply, foreign money supply and real effective exchange rate are used as explanatory variable with trade balance as the dependent variable. In order to test the J-curve phenomenon the lagged values of exchange rata are also included. Quarterly time series data from 1999 to 2016 are used. Before estimating the model the time series properties of the data are diagnosed and an error correction model is developed and estimated. The estimated results show that the contemporaneous effect of devaluation is positive, but the total effect is insignificant. A J-curve pattern of adjustment of the trade balance is also detected.

Modelling short-run and long-run predictors of foreign portfolio investment volatility in low-income Southern African Development Community countries

Orientation: This study examined the main predictors of net foreign portfolio investment volatility in low-income Southern African Development Community (SADC) countries. Based on the World Bank data (July 2014), the selected countries are Zimbabwe, Zambia, Malawi, Lesotho, Madagascar, Mozambique, DRC, Swaziland and Tanzania. Research purpose: The purpose of this study is to establish the main drivers of net foreign portfolio investment volatility in low-income SADC countries. Motivation for the study: This study is also motivated by mixed findings in foreign portfolio investment debate on why capital flows are more volatile and difficult to manage in developing than in advanced economies. Although it is acknowledge that developing markets are characterised by the poor quality of financial institutions in economies with weak macroeconomic fundamentals, which ultimately pose a greater risk of sudden stops or reversal of foreign portfolio flows, findings remain inconclusive on what actually drives net foreign portfolio investment volatility in low-income countries. Research approach/design and method: The Panel Autoregressive Distributed Lag (P-ARDL) model is employed to determine the short- and long-run drivers of such investment volatility in these countries. The study uses quarterly data for the period spanning 2000 to 2015. Main findings: The findings reveal that all the variables in the model, namely money supply, world output, general prices, real gross domestic product, domestic interest rates and international interest rates, are significant predictors of net foreign portfolio investment volatility. However, positive long-run effects are observed from world gross domestic product, real gross domestic product, prices and money supply, whilst domestic interest rates and international interest rates displayed a negative association in the long run. These findings are consistent with both the economic literature and the empirical literature, which suggest that an increase in interest rates or higher interest rates affects foreign portfolio investment. Similarly, in the short run, all the variables employed in the model are the main predictors of net foreign portfolio investment volatility in low-income SADC countries. Practical/managerial implications: Policy-makers should embark on policies and programs that promote economic performance in order to attract stable foreign portfolio flows that will lead to stable markets and reduce volatility in the economy. Policy consistency is thus, recommended to attract investors to the region and ensure that stock and bond markets are viable and stable. Contribution/value-add: Unlike other existing studies, the measure of volatility employed in this is considered superior as it is based on net portfolio flows which reflect changes in an economy’s overall current account position. The study informs and advances the current discourse on the causes of capital flow volatility in the field of investment theory and practice.

Forward Premium Puzzle and Heterogeneous Beliefs

We propose a two-country model with heterogeneous beliefs to understand the forward premium puzzle. Facing a shock to the domestic money supply, the disagreement between domestic and foreign investors shifts the relative wealth of investors, which moves the exchange rate and interest rate differential in opposite directions. Calibrated to U.S. and U.K. data, our model reproduces the rejection of the uncovered interest rate parity. Using a monthly index of heterogeneous beliefs based on the Consensus Forecast in 15 major economies, the empirical evidence confirms that the dispersion of beliefs helps explain exchange rate movements and carry trade returns.