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Monetary model of exchange rate determination under floating and non-floating regimes

Monetary model of exchange rate determination under floating and non-floating regimes The purpose of this paper is to empirically analyse how different exchange rate regimes affect the links between monetary fundamentals and exchange rates in Sub-Saharan Africa.Design/methodology/approachUsing the Pedroni method for panel cointegration, mean group and pooled mean group and the panel vector autoregressive technique, this study empirically investigates whether monetary fundamentals impact exchange rates similarly in both regimes. Thus, the author acquires needed and credible empirical data.FindingsThe result suggests that the impact is dissimilar. In the floating regime, an increase in relative money supply and relative real output depreciates and appreciates the nominal exchange rate in the long run whereas in the non-floating regime, the evidence is mixed. Thus, exchange rates bear a theoretically consistent relationship with monetary fundamentals across SSA countries with floating regimes but fails under non-floating regimes. This provides evidence that regime choice is important if the relationship between monetary fundamentals and exchange rates in SSA are to be theoretically consistent.Originality/valueThis study empirically incorporates the dissimilarities in exchange rate regimes in a panel framework and study the links between exchange rates and monetary fundamentals. The focus on how exchange rate regimes might alter the equilibrium relationships between exchange rates and monetary fundamentals in SSA is a pioneering experiment. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png China Finance Review International Emerald Publishing

Monetary model of exchange rate determination under floating and non-floating regimes

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Publisher
Emerald Publishing
Copyright
© Emerald Publishing Limited
ISSN
2044-1398
DOI
10.1108/cfri-10-2017-0204
Publisher site
See Article on Publisher Site

Abstract

The purpose of this paper is to empirically analyse how different exchange rate regimes affect the links between monetary fundamentals and exchange rates in Sub-Saharan Africa.Design/methodology/approachUsing the Pedroni method for panel cointegration, mean group and pooled mean group and the panel vector autoregressive technique, this study empirically investigates whether monetary fundamentals impact exchange rates similarly in both regimes. Thus, the author acquires needed and credible empirical data.FindingsThe result suggests that the impact is dissimilar. In the floating regime, an increase in relative money supply and relative real output depreciates and appreciates the nominal exchange rate in the long run whereas in the non-floating regime, the evidence is mixed. Thus, exchange rates bear a theoretically consistent relationship with monetary fundamentals across SSA countries with floating regimes but fails under non-floating regimes. This provides evidence that regime choice is important if the relationship between monetary fundamentals and exchange rates in SSA are to be theoretically consistent.Originality/valueThis study empirically incorporates the dissimilarities in exchange rate regimes in a panel framework and study the links between exchange rates and monetary fundamentals. The focus on how exchange rate regimes might alter the equilibrium relationships between exchange rates and monetary fundamentals in SSA is a pioneering experiment.

Journal

China Finance Review InternationalEmerald Publishing

Published: May 16, 2019

Keywords: Cointegration; Model; Time series; Fundamentals; Exchange rate; Floating and non-floating regime

References