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

GROUP 3
TESTING THE MONETARY
MODEL OF EXCHANGE RATE
DETERMINATION: THE CASES
OF SINGAPORE AND THAILAND


STRUCTURE
INTRODUCTION
DATA

RESULTS

CONCLUSION


BACKGROUND

PART 1

INTRODUCTIO
N

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

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 = 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 (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
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.


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?