Exchange Rate Equation Research Articles

Simultaneous Equation: The Case of Inflation & Rupiah Exchange Rate in Indonesia 2001-2022

This study aims to determine the relationship between inflation and the rupiah exchange rate in Indonesia in 2001-2022, using simultaneous equations through a two-stage least square (2SLS) approach. The method used in this study is simultaneous equation regression, in which the variables are interconnected. The data used in this study is Indonesian state data for 2001-2022, including inflation, exchange rates, interest rates, gross domestic product, and exports obtained from the Badan Pusat Statistik (BPS) Indonesia website. The results of the study based on the two-stage least square (2SLS), the simultaneous equation of inflation (INF), showed that the variable interest rate (R) and gross domestic product (GDP) had a significant effect on inflation (INF). In contrast, the exchange rate variable (ER) did not significantly affect inflation (INF). Simultaneously, the exchange rate (ER), interest rate (R), and gross domestic product (GDP) affected inflation (INF) because F (prob) was smaller from alpha = 5%. Then, in the exchange rate equation (ER), inflation variables (INF), money supply (M2) and exports (X) have a significant effect on the exchange rate. Simultaneously, Inflation (INF), money supply (M2), and exports (X) affect the exchange rate (ER) because F (prob) is smaller than alpha = 5%.

The Cointegration Relationship Between Money Supply, Exchange Rate and Economic Growth In Iraq (2004-2020)

This study aims to analyze the cointegration relationships between money supply, exchange rate, and economic growth in Iraq, through the use of quarterly data during the period from 2004 to 2020, as well as the use of Johansson's cointegration test, The Vector Error Correction Model (VECM), and Granger's causality test, the economic growth equation has revealed the following results: the exchange rate and money supply in the long term have a positive and significant impact on the economic growth during the period 2004-2020. However, in the short term, the real gross domestic product is positively affected by its value and money supply in lag periods and negatively by the real exchange rate, interest rate on lending, and inflation, but the interest rate effect is not significant. As for the exchange rate equation, the relationship between gross domestic product and money supply showed that it is direct with the exchange rate in Iraq during the period 2004-2020 in the long term and that the exchange rate is positively affected by its lag value during previous periods, and the effect of the interest rate on lending and inflation is positive on the exchange rate, but not significant in the short term. The money supply equation showed that the gross domestic product is directly related to the money supply, while the latter is related to an inverse relationship with the exchange rate in Iraq during the period 2004-2020 in the long term, whereas the money supply is related to a direct relationship with the real exchange rate and is negatively affected by the rate of inflation. As for the interest rate on lending, its impact is positive, but not significant, on the exchange rate in the short term. The study recommended that the mutual influence between the real exchange rate and the gross domestic product should be taken into account when drawing and formulating the monetary policy of the exchange rate in Iraq.
 

Estimating Structural Shocks with the GVAR-DSGE Model: Pre- and Post-Pandemic

This paper investigates the possibility of using the global VAR (GVAR) model to estimate a simple New Keynesian DSGE-type multi-country model. The long-run forecasts from an estimated GVAR model were used to calculate the steady-states of macro variables as differences. The deviations from the long-run forecasts were taken as the deviation from the steady-states and were used to estimate a simple NK open economy model with an IS curve, Philips curve, Taylor rule, and an exchange rate equation. The shocks to these equations were taken as the demand shock, supply shock, monetary shock, and exchange rate shock, respectively. An alternative model was constructed to compare the results from GVAR long-run forecasts. The alternative model used a Hodrick–Prescott (HP) filter to derive deviations from the steady-states. The impulsive response functions from the shocks were then compared to results from other DSGE models in the literature. Both GVAR and HP estimates produced dissimilar results, although the GVAR managed to capture more from the data, given the explicit co-integration relationships. For the IRFs, both GVAR and HP estimated DSGE models appeared to be as expected before the pandemic; however, if we include the pandemic data, i.e., 2020, the IRFs are very different, due to the nature of the policy actions. In general, DSGE–GVAR models appear to be much more versatile, and are able to capture dynamics that HP filters are not.

CAPTURING THE FLUCTUATIONS OF SOME ALGERIAN MACROECONOMIC VARIABLES USING NEW KEYNESIAN MODEL FOR SMALL OPEN ECONOMY FOR THE PERIOD 2000-2018: A BVAR-DSGE APPROACH

In this study, we estimated and simulated an NKDSGE model for Algeria based on the method through which a small open economy should react to economic. The model consists of hybrid equations for the IS curve, Phillips curve, exchange rate equation and monetary policy based on Taylor's type. We estimated the system of equations by the BVAR technique on quarterly Algerian macroeconomic data from 2000 to 2018. We have then used the estimated parameter values in the simulation to capture the impact of foreign shocks for: inflation, output, technology, trade terms and monetary policy on the Algerian macroeconomic. The results confirmed that all foreign shocks contributed to the fluctuations of domestic GDP, domestic inflation and exchange rate through simultaneous economic cycles between 2-4 years except the worldwide output shock, which lasted about 10 years. The monetary rule appeared to play its role each time with a faithful memory of the historical interest rate without giving much weight to the exchange rate, domestic output and inflation.

PERNERAPAN MODEL PERSAMAAN SIMULTAN DENGAN PENDEKATAN TWO STAGE LEAST SQUARE PADA KASUS INFLASI DAN NILAI TUKAR RUPIAH DI INDONESIA

Using the regression model, a method that accommodates variables related to each other is called the simultaneous equation method. The study aims to determine the factors affecting inflation and rupiah exchange rate and model simultaneous equations towards the factors affecting inflation and rupiah exchange rate in Indonesia using Two-Stage Least Square. Data used in this study are secondary data obtained from the website of Statistics of Indonesia. Findings on the simultaneous equation model with two-stage least squares reveal that variables that significantly affect inflation are the Indonesia rupiah exchange rate and money supply. At the same time, variables that significantly affect the Indonesian rupiah exchange rate are inflation and money supply. The predictive value using the inflation and rupiah exchange rate equation indicates that the obtained MAPE (Mean Absolute Percentage Error) value does not exceed 50%. In conclusion, the prediction result using the inflation and Indonesia rupiah exchange rate equation is accurate.

The Kinetic Model of Diffusion and Reactions in Powder Catalysts during Temperature Programmed Oxygen Isotopic Exchange Process

The mathematical model of diffusion in powder oxide catalysts during the process of temperature programmed oxygen isotopic exchange is proposed. The diffusion is considered together with the homogeneous and heterogeneous oxygen isotopic exchange processes. The matrix forms of exchange rate equations of simple and complex heteroexchange, and homoexchange reactions which obtain symmetrical forms are analyzed. The quantitative values of model parameters are found from the fitting of experimental data taken from literature of temperature programmed oxygen isotopic exchange process in catalysts ZrO2 and CeO2. The fittings show a good matching of model results with experimental data. The shapes of kinetic curves registered during temperature programmed oxygen isotopic exchange process are analyzed and the influence of various process parameters such as activation energies of simple and complex heteroexchange, oxygen surface concentration of catalyst, ratio of catalysts surface and volume of reactor, diffusion activation energy is considered. The depth profiles of diffusing oxygen species in oxide catalysts powder are calculated.

Does Bitcoin behave as a currency?: A standard monetary model approach

We derive the Bitcoin exchange rate dynamics by solving the exchange rate equation of the standard flexible-price monetary model to investigate any characteristics of Bitcoin like a currency. The dynamics is driven by an asymmetric mean-reverting fundamental shock which can be attributed to a money demand shock. A crash occurs when the exchange rate with a weakened mean-reverting force breaches a lower boundary where a smooth-pasting condition is imposed. The empirical results show the exchange rate dynamics can be calibrated according to the model, in which the mean reversion of the dynamics is positively co-integrated with the Bitcoin transaction volume indicating demand for Bitcoin; and with the risk reversals of the commodity currencies (Australian dollar and Canadian dollar) in currency option markets. The analysis shows that the Bitcoin exchange rate shares some characteristics of commodity currencies with crash risk. This suggests that Bitcoin behaves as a currency between fiat money and a crypto-commodity used for trading and investment purposes.

Ballistic transport and quantum unfurling in molecular junctions via minimal representations of quantum master equations.

Quantum furling and unfurling are inelastic transitions between localized and delocalized electronic states. We predict scenarios where these processes govern charge transport through donor-bridge-acceptor molecular junctions. Like in the case of ballistic transport, the resulting currents are nearly independent of the molecular bridge length. However, currents involving quantum furling and unfurling processes can be controlled by the coupling to vibrations in the intra-molecular and the extra-molecular environment, which can be experimentally tuned. Our study is based on rate equations for exchange of energy (bosons) and particles (fermions) between the molecular bridge and its environment. An efficient algorithm is introduced for a compact representation of the relevant rate equations, which utilizes the redundancies in the rate matrix and the sparsity of the creation and annihilation operators in the molecular Fock space.

Real Exchange Rate Fundamentals: A Synthesis of the Literature

A general review of approaches to equilibrium real exchange rate was undertaken. The review covered most of the theoretical, methodological and empirical literatures that had been developed in the attempt to overcoming the measurement problems associated with the concept. The distinct approaches reviewed in the paper included, exchange rate equations with nominal and real disturbances, the purchasing power parity doctrine, productivity approach, macroeconomic balance, varieties of exchange rate equation models, and, behavioral equilibrium exchange rate approach. Although the models were generally theory-based and reasonably well motivated, a comprehensive evaluation of the appropriateness of some of the theoretically identified fundamentals might be a most desired status credibility check.

Oil Price and Exchange Rate Nexus-Evidence From Nigeria

Price swings at international crude oil market significantly impact on macroeconomic fundamentals of oil dependent countries. Hence, understanding the relationship between oil price movement and the exchange rate has become imperative especially for oil exporting countries. This paper examines the causal effect between oil prices and Nigerian naira–US dollar exchange rate using frequency daily data for the period 12/07/2010-31/08/2017. Generalized autoregressive conditional heteroskedasticity (GARCH) and exponential GARCH (EGARCH) models were used to estimate our oil prices and nominal naira exchange rate equation. Our findings reveal a positive relation between oil price and naira exchange rate meaning that an upward movement in the price of oil causes the naira to depreciate. Conversely, any fall in oil price leads to appreciation in the value of the naira. The result has important policy implication given that 90% of the total annual foreign revenue of Nigeria comes from oil thus oil price shocks have severe impact on the Nigerian economy. This justifies the need for Nigeria’s economic diversification to minimize the vulnerability of the Nigerian economy to vagaries of the international crude oil market and to delink the exchange rate and reserve movement from developments in oil prices.

Does Bitcoin Behave As a Currency?: A Standard Monetary Model Approach

We derive the Bitcoin exchange rate dynamics by solving the exchange rate equation of the standard flexible-price monetary model to investigate any characteristics of Bitcoin like a currency. The dynamics is driven by an asymmetric mean-reverting fundamental shock which can be attributed to a money demand shock. A crash occurs when the exchange rate with a weakened mean-reverting force breaches a lower boundary where a smooth-pasting condition is imposed. The empirical results show the exchange rate dynamics can be calibrated according to the model, in which the mean reversion of the dynamics is positively co-integrated with the Bitcoin transaction volume indicating demand for Bitcoin; and with the risk reversals of the commodity currencies (Australian dollar and Canadian dollar) in currency option markets. The analysis shows that the Bitcoin exchange rate shares some characteristics of commodity currencies with crash risk. This suggests that Bitcoin behaves as a currency between fiat money and a crypto-commodity used for trading and investment purposes.

An empirical test for the effectiveness of central bank interventions in foreign exchange markets: An application to the Canadian and Swiss Central Banks

Abstract. This paper investigates the effectiveness of foreign exchange intervention of central banks of Canada and Switzerland. We examine the effectiveness of Canada and Switzerland interventions policies on Canadian dollar against US dollar and Swiss franc against US dollar exchange rates volatility over the 1980-2014 period. A behavioral exchange rate equation is estimated with instrumental variables methodology. The main results indicate that interventions generally reduce exchange rates volatility. However, the Swiss National Bank seems to be more efficient by stabilizing the Swiss franc than the Bank of Canada, whose interventions, despite its effectiveness, remains weak. Keywords. Volatility, Exchange rate, Official international reserves. JEL. E51, E52, E58.

Exchange Rate Solutions With Currency Crashes

We present an exchange rate model in which a currency’s exchange rate is confined in a wide moving band and a currency crash occurs when the rate breaches the lower boundary. A solution is derived from the standard log exchange rate equation for the model with a smooth-pasting condition at the lower boundary. Using an asymmetric mean-reverting fundamental shock, the solution shows the exchange rate follows a mean-reverting square-root process, which is quasi-bounded at the boundary, and generates left-skewed exchange rate distributions consistent with empirical observations. The probability leakage for the exchange rate across the boundary increases with a weakened mean-reverting force for the exchange rate, suggesting an increase in currency crash risk. The empirical results show the exchange rates of nine major currencies against the US dollar can be calibrated according to the model, where the mean reversion is negatively cointegrated with the risk reversals in currency option markets, as expected by the model, and are consistent with the positive relationship between currency crash risk and risk reversals. The leakage condition for breaching the lower boundaries was met during the 2008 global financial crisis when most of the currencies were under the disaster shock.

A Forward Looking Small Semi-Structural Macroeconomic Model For Bangladesh

Small semi-structural models are suitable to explicate the monetary transmission mechanism by recognizing the interrelationships among major macroeconomic variables. This study presents a small semi-structural dynamic general equilibrium (DGE) New Keynesian model for Bangladesh to explore the dynamic interrelationships among major macroeconomic variables related to the transmission mechanism of monetary policy. Our DGE model comprises of four key behavioral equations – the aggregate demand (output), aggregate supply (inflation), interest rate and, the exchange rate. Using quarterly data over the sample period from 2006:Q3 to 2016:Q2, we have used Generalized Method of Moments estimation technique, which is useful for estimating forward-looking reaction functions on the basis of expected values for macroeconomic variables. The findings demonstrate that the model is inclusive enough to capture how the selected variables are interrelated. In most of the cases, the study finds significant and similar nature of interrelationships among the major macroeconomic variables as found by previous studies on Canada, Thailand, and South Africa. The model is also flexible enough in understanding shock propagation and conducting policy analyses. For Bangladesh, the policy transmission mechanism is found less efficient to control the monetary system (over 10 years to revert to steady state after the occurrence of shocks), while Canada, South Africa, and Thailand need 5 years, 10 years, and 10 years, respectively. This happens mainly due to the weak monetary policy which has two consequences. First, a small reaction parameter in the interest rate equation which means that the interest rate is only marginally adjusted to high inflation. Second, a small effect of monetary policy on the economy through the output and exchange rate equations. Most notably, in the exchange rate equation, the uncovered interest parity indicates a low coefficient. This might happen due to the absence of inflation targeting monetary policy in Bangladesh. A strong and quick policy response is required which could be achieved by implementing two major policy tasks: adoption of an inflation-targeting monetary policy, and full autonomy of Bangladesh Bank in both administrative and functional areas.

Importance Of Real And Nominal Shocks In Us Macroeconomic And Exchange Rate Fluctuations

It is important for the policy makers to know what kinds of shocks are responsible for macroeconomic fluctuations or recession to formulate appropriate policy responses. This paper exploits a stylized model to identify the sources of macroeconomic and exchange rate fluctuations in the US. The model consists of a productivity equation, a demand function, an exchange rate augmented Phillips curve, a monetary policy rule and an exchange rate equation (uncovered interest parity (UIP) condition). The stylized model implies a set of short-run restrictions that allow for the identification of the structural shocks in a vector autoregression model in order to test the model’s consistency with data. We use real GDP for output, GDP deflator for price, Federal fund rate (FF) as monetary policy. The other two variables are unemployment rate and Nominal effective exchange rate (NEER). Throughout the analyses oil price is used as an exogenous variable. The Sample period starts from 1980q1, and ends at 2008 q2 to avoid possible non-linearity arise from 2008 financial crisis. Results show that more than half of the fluctuation in unemployment and output is explained by two shocks namely productivity/technology shock and aggregate demand shock. Monetary policy shock can explain around 15 per cent while supply and exchange rate shock explain less than 10 percent of the variation in unemployment and output. These results from our simple model are compatible with those from more sophisticated models found in current literature. Hence, our model is more appealing to the policy makers. Further, to gauge the importance of monetary policy in stabilizing the economy, a counterfactual simulation exercise is performed. The exercise shows that monetary policy has stabilized inflation and unemployment, though at the cost of increasing variability in output. The findings of this paper emphasize that policy makers should be aware of the importance of demand side shocks such as policy uncertainty and money supply. A positive uncertainty shock (an increase in uncertainty) may reduce investment and may slow the economic recovery. On the other hand, a prolong period of expansionary monetary policy may make the inflation expectations less anchored. Therefore, the policy makers should try to keep the impact of policy uncertainty at the minimum level and should follow prudent monetary policy.

Dynamic ridge polynomial neural network with Lyapunov function for time series forecasting

The ability to model the behaviour of arbitrary dynamic system is one of the most useful properties of recurrent networks. Dynamic ridge polynomial neural network (DRPNN) is a recurrent neural network used for time series forecasting. Despite the potential and capability of the DRPNN, stability problems could occur in the DRPNN due to the existence of the recurrent feedback. Therefore, in this study, a sufficient condition based on an approach that uses adaptive learning rate is developed by introducing a Lyapunov function. To compare the performance of the proposed solution with the existing solution, which is derived based on the stability theorem for a feedback network, we used six time series, namely Darwin sea level pressure, monthly smoothed sunspot numbers, Lorenz, Santa Fe laser, daily Euro/Dollar exchange rate and Mackey-Glass time-delay differential equation. Simulation results proved the stability of the proposed solution and showed an average 21.45% improvement in Root Mean Square Error (RMSE) with respect to the existing solution. Furthermore, the proposed solution is faster than the existing solution. This is due to the fact that the proposed solution solves network size restriction found in the existing solution and takes advantage of the calculated dynamic system variable to check the stability, unlike the existing solution that needs more calculation steps.

Exchange Rate and Trade Balance of Bangladesh: Causality and Cointegration Analysis

We investigate the interrelationship between the monthly trade balance and exchange rate data of Bangladesh. We find the existence of cointegration between these two variables. Error correction model reveals that the speed of adjustment coefficient of the trade balance equation corrects about 13% of any deviation from the long-run path within a month with a unidirectional causality running from exchange rate to trade balance. While the speed of adjustment coefficient of the exchange rate equation corrects only 0.003% within a month. This is somewhat slow and statistically insignificant.Journal of Business and Technology (Dhaka) Vol.9(2) 2014; 15-25

The price of gold and the exchange rate: Evidence from threshold cointegration and threshold granger causality analyses for Turkey

This paper explores the relationship between gold prices and the US dollar/Turkish lira exchange rate between 1990–2011 by using cointegration and Granger causality analyses. The empirical findings indicate that there is a threshold cointegration relationship between the two variables. The threshold value obtained from the estimation of threshold vector error correction model equals −3.268. The Granger test indicates that there is evidence of a bi-directional causal relationship between gold prices and the exchange rate, except when the threshold parameter exceeds the threshold value in the exchange rate equation. According to these findings, gold price can be used as a hedge against the exchange rate. However, since this relationship disappears above the threshold value, gold is only a weak hedge against exchange rate fluctuations.

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Exchange rate dynamics under alternative optimal interest rate rules

We explore the role of interest rate policy in the exchange rate determination process. Specifically, we derive exchange rate equations from interest rate rules that are theoretically optimal under a few alternative settings. The exchange rate equation depends on its underlying interest rule and its performance could vary across evaluation criteria and sample periods. The exchange rate equation implied by the interest rate rule that allows for interest rate and inflation inertia under commitment offers some encouraging results — exchange rate changes “calibrated” from the equation have a positive and significant correlation with actual data, and offer good direction of change prediction. Our exercise also demonstrates the role of the foreign exchange risk premium in determining exchange rates and the difficulty of explaining exchange rate variability using only policy based fundamentals.