POWERPOINT TESTING THE MONETARY MODEL OF EXCHANGE RATE DETERMINATION THE CASES OF SINGAPORE AND THAILAND

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.

TESTING THE MONETARY MODEL OF EXCHANGE RATE DETERMINATION: THE CASES

OF SINGAPORE AND THAILAND

GROUP 3

STRUCTURE INTRODUCTION

DATA

RESULTS

CONCLUSION

PART 1

INTRODUCTIO

N

BACKGROUND

LIITERATURE REVIEW

THEORTICAL FRAMEWORK

1 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

currency to

appreciate

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

Evidence from a Century of Data”

◍ 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 France, Italy, the Netherlands, and Spain

THEORITICAL FRAMEWORK

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

🎃 ASSUMPTIONS

A basic form of the monetary model

◍ mt : money supply

◍ yt : real output

The nominal

ER

◍ et : units of

foreign currency/domes

tic currency

The nominal ER

◍ Mark and Sul

(2001): α = 1

The simple form of the monetary

model:

The long-run monetary model requires 3 variables:

et, (m*t – mt), (y*t – yt)

Population:

et = β0 + β1 (mt * - mt) + β2 (y*- y ) + ui

PART 2: DATA

• OLS using Eviews 8

PART 3: RESULTS

Model

e = β0 + β1 (mm2 * - m2) + β2 (my*-

e: Nominal exchange rate

m 2 * : money supply of Thailand

m 2 : money supply of Singapore

y * : real GDP of Thailand

y : real GDP of Singapore

m 2 * - m 2 = ∆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

u i : Effects of other variables to exchange rate

Estimating results:

e = 0.0434 + 1.24e-8 (mm2 * - m2) + 1.78e

-7(my*- y ) (m1)

where:

◍ β0 = 0.0434 > 0, implying that if m t * is equal to m t and is y t *

equal to y t then the exchange rate will be 0.0434.

◍ β1 = 1.24e -8 (m=4.1597*10 -4 ) > 0, implying that if ∆m2 increases

1 unit, then average of et will increases 4.1597*10 -4 units.

◍Specific case:

◍05/14/2017, 1 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 1 unit, then average et will increases 1.78e -7 units.

◍ According to the

principles of

macroeconomics:

the home country

increases (Government

rise money supply)

will be depreciated

(undervalued)

◍ => The price of

exported goods or

services fall while

imported components

more expensive

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.

Any questions?