Besides, the Governments and the Central Banks can manipulate exchange rate by indirect ways such as: trade barriers (tariff, quota,...), managed by the interest rate, derivative operations and so on.For further work: testing the impact of derivatives on the exchange rate with some specific cases to clarify the theories of exchange rates.
GROUP TESTING THE MONETARY MODEL OF EXCHANGE RATE DETERMINATION: THE CASES OF SINGAPORE AND THAILAND STRUCTURE INTRODUCTION DATA RESULTS CONCLUSION BACKGROUND PART INTRODUCTIO N LIITERATURE REVIEW THEORTICAL FRAMEWORK BACKGROUND Exchange rate movements are perhaps the most important factors affecting sales and profit forecasts, capital budgeting plans and the value of international investments What affects exchange rates ? How to measure their influences ? “ The simple monetary model of exchange rate determination Test whether a simple form of the exchange rate model for Singapore and Thailand based on the relationship among nominal exchange rates, money supply and income MONEY SUPPLY ◍An increase of country’s money supply causes it’s currency to depreciate ◍An decrease of country’s money supply causes it’s INCOME The greater income => More goods and services can be bought => More money is needed to conduct transactions (Fisher, 1911) => the exchange rate will be upward (Mundell – Fleming model) LITERATURE REVIEW ◍ Frankel (1982) -“The Mystery of the Multiplying Marks: A Modification of the Monetary Model” ◍ Smith and Wickens(1986) – “An Empirical Investigation into the Causes of Failure of the Monetary model of the Exchange Rate” ◍ MacDonald and Taylor (1994) - “The Monetary Model of the Exchange Rate: Long-run Relationships, Short-run Dynamics and How to Beat a Random Walk” ◍ Rapach and Wohar (2001) - “Testing the Monetary Model of Exchange Rate Determination: New ◍ Basic monetary model ◍ Domestic and foreign interest rates are equal ◍ Annual data for 14 industrialized countries ◍ Using ordinary least squares (OLS) ◍ Results: substantial support for the basic long-run monetary model for THEORITICAL FRAMEWORK 🎃 ASSUMPTIONS The demand for real money balances is a stable function Uncovered-interest parity (UIP) holds at all times The supply of money is determined by a stable process Purchasing power parity (PPP) holds Expectations are in some sense rational A basic form of the monetary model ◍ mt : money supply ◍ pt : price level ◍ it : nominal interest rate ◍ yt : real output ◍ All varibles are stated at time t The nominal ER ◍ et : units of foreign currency/domes tic currency The nominal ER ◍Mark and Sul (2001): α = The simple form of the monetary model: The long-run monetary model requires variables: et, (m*t – mt), (y*t – yt) Population: et = β0 + β1 (mt* - mt) + β2 (y*- y ) + ui PART 2: DATA • OLS using Eviews PART 3: RESULTS Model e = β0 + β1 (m2* - m2) + β2 (y*y ) + ui where: e: Nominal exchange rate m2* : money supply of Thailand m2 : money supply of Singapore y* : real GDP of Thailand y : real GDP of Singapore m2* - m2 = ∆m2: the difference between money supply of Thailand and money supply of Singapore y*- y = ∆GDP : the difference between real GDP of Thailand and real GDP of Singapore ui : Effects of other variables to exchange rate Estimating results: e = 0.0434 + 1.24e-8 (m2* - m2) + 1.78e7 where: (y*- y ) (1) ◍β0 = 0.0434 > 0, implying that if mt* is equal to mt and is yt* equal to yt then the exchange rate will be 0.0434 ◍β1 = 1.24e-8 (=4.1597*10-4) > 0, implying that if ∆m2 increases unit, then average of et will increases 4.1597*10-4 units ◍Specific case: ◍05/14/2017, Baht ThaiLand (THO) was exchanged for 0.04 Dollar Singapore (SGD) ◍If the Singapore Government increases the money supply by 10 millions USD dollar (that equal 14.091 millions SGD), the exchange rate between Dollar Singapore and Baht ThaiLand will be rise and reached 0.044159 SGD/THO ◍β2 = 1.78e-7 > 0, implying that if ∆GDP increases unit, then average et will increases 1.78e-7 units principles of macroeconomics: ◍ if quantity of money in the home country increases (Government rise money supply) ◍ => domestic currency will be depreciated (undervalued) ◍ => The price of exported goods or services fall while imported components PART 4: CONCLUSION ◍ Therefore when e fall down, exports will become competitive and imports will become uncompetitive ◍ => The country will export more and import less That makes the balance of payment surplus and leads to increase value of GDP There are three ways directly manipulate money supply: ◍ Besides, the Governments and the Central Banks can manipulate exchange rate by indirect ways such as: trade barriers (tariff, quota, ), managed by the interest rate, derivative operations and so on ◍ For further work: testing the impact of derivatives on the exchange rate with some specific cases to clarify the theories of exchange rates Thanks! Any questions? ... affects exchange rates ? How to measure their influences ? “ The simple monetary model of exchange rate determination Test whether a simple form of the exchange rate model for Singapore and Thailand. .. -? ?The Mystery of the Multiplying Marks: A Modification of the Monetary Model? ?? ◍ Smith and Wickens(1986) – “An Empirical Investigation into the Causes of Failure of the Monetary model of the Exchange. .. ∆m2: the difference between money supply of Thailand and money supply of Singapore y*- y = ∆GDP : the difference between real GDP of Thailand and real GDP of Singapore ui : Effects of other variables