Non-Linearity In Monetary Models Of Exchange Rate In Five Asean Countries
This study is a part of the research endeavor since 1970s in searching for a satisfactory exchange rate forecasting model. The main objective is to evaluate the forecast performance of the relevant monetary exchange rate models, which are determined by the linear and non-linear approaches. Partic...
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| Format: | Thesis |
| Language: | English English |
| Published: |
2008
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| Online Access: | http://psasir.upm.edu.my/id/eprint/5055/1/FEP_2008_3.pdf http://psasir.upm.edu.my/id/eprint/5055/ |
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| Summary: | This study is a part of the research endeavor since 1970s in searching for a satisfactory
exchange rate forecasting model. The main objective is to evaluate the forecast
performance of the relevant monetary exchange rate models, which are determined by the
linear and non-linear approaches. Particularly, the long-run cointegration relationship
between yen-based currencies of five major South East Asian countries including
Indonesia, Malaysia, Singapore, Thailand and the Philippines (collectively known as
ASEAN-5) and their fundamentals are investigated using the carefully designed testing
procedures that include integration order, cointegration and exogeneity tests. The set of
potential exchange rate determinants including domestic and Japanese money supplies,
aggregate output levels, aggregate price levels and interest rates are included in this study.
In this respect, several versions of monetary exchange rate models are considered. The
lately developed non-linear stationary and non-linear cointegration tests are also
employed aiming to provide complementary if not improvement to the robustness of conventional tests. Towards the end of this study, the valid monetary exchange rate
models are estimated for the ultimate purpose of forecast performance evaluation.
The major finding of this study is that both the purchasing power parity model and the
reduced form forward-looking monetary model can have excellence predictive power for
the dynamic behaviour of yen-based ASEAN-5 nominal exchange rates, over forecast
horizon of 24 months or less, based non-linear smooth transition regression (STR)
modeling procedures. Hence, this study is able to provide evidence to contradict the
assertion that empirical exchange rate models have weak predictive power at horizons
less than two years (Lycons, 2002). Importantly, the empirical forecasting performance of
non-linear STR modeling procedures is for the first time revealed in this study.
Besides, this study identifies that, as far as ASEAN-5 is concern, current and past values
domestic money supply, domestic aggregate output, Japan money supply, Japan
aggregate output are the main driving forces of the current exchange rate dynamic, in
addition to the past values of exchange rates. Furthermore, this study uncovers that rather
than the long-perceived linear and symmetrical behavior, the nominal exchange rates
adjust towards monetary fundamentals in a non-linear and asymmetrical fashions with
respect to appreciation and depreciation of exchange rates, inflation and deflation,
expansionary and contractionary monetary policy, as well as the economic cycles of both
domestic and Japan countries. Taken together, these findings have important impacts on
policy-decision and implementations as pointed out in the last chapter of this study. |
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