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Monetary Model of Exchange Rate for Thailand: Long-run Relationship and Monetary Restrictions

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  • Liew, Venus Khim-Sen
  • Baharumshah, Ahmad Zubaidi
  • Puah, Chin-Hong

Abstract

This paper examines the long-run relationship between exchange rate and its determinants based on the flexible-price monetary model. Multivariate cointegration approach (Johansan 1988, 1989 and Johansen-Juselius 1990) is adopted to attain our objective of study. The empirical results provide evidence favoring the monetary approach to exchange rate for a small and open emerging economy, namely Thailand. In addition, the validity of the underlying assumptions of the monetary approach to the determination of exchange rate is established. The above findings suggest that exchange rate players may effectively monitor and forecast the exchange rate movement via the money supplies, incomes, and interest rates variables of both Thailand and Japan. Besides, one has to follow the economic development of Thailand’s major trading partner, Japan, to understanding the movement of exchange rate for Thailand. Moreover, our findings add new insights to accompaniment previous studies that documented the important influence of US in the emerging Asian economies.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 17715.

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Date of creation: 2009
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Handle: RePEc:pra:mprapa:17715

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Keywords: Exchange rate; monetary model; Thailand; cointegration;

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  1. Frenkel, Jacob A, 1976. " A Monetary Approach to the Exchange Rate: Doctrinal Aspects and Empirical Evidence," Scandinavian Journal of Economics, Wiley Blackwell, vol. 78(2), pages 200-224.
  2. repec:ebl:ecbull:v:6:y:2008:i:31:p:1-13 is not listed on IDEAS
  3. Abbott, Andrew & De Vita, Glauco, 2002. "Testing the long-run structural validity of the monetary exchange rate model," Economics Letters, Elsevier, vol. 75(2), pages 157-164, April.
  4. MacDonald, Ronald & Taylor, Mark P., 1991. "The monetary approach to the exchange rate : Long-run relationships and coefficient restrictions," Economics Letters, Elsevier, vol. 37(2), pages 179-185, October.
  5. Venus khim-sen Liew, 2009. "Linear and nonlinear monetary approaches to the exchange rate of the Philippines peso-Japanese yen," Economics Bulletin, AccessEcon, vol. 29(2), pages 1320-1329.
  6. Swarna Dutt & Dipak Ghosh, 2000. "An empirical note on the monetary exchange rate model," Applied Economics Letters, Taylor & Francis Journals, vol. 7(10), pages 669-671.
  7. Rapach, David E. & Wohar, Mark E., 2002. "Testing the monetary model of exchange rate determination: new evidence from a century of data," Journal of International Economics, Elsevier, vol. 58(2), pages 359-385, December.
  8. Frank Agbola & Chartri Kunanopparat, 2005. "Determinants of exchange rate practices: some empirical evidence from Thailand," Applied Economics, Taylor & Francis Journals, vol. 37(7), pages 807-816.
  9. Tatsuyoshi Miyakoshi, 2000. "The monetary approach to the exchange rate: empirical observations from Korea," Applied Economics Letters, Taylor & Francis Journals, vol. 7(12), pages 791-794.
  10. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
  11. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501.
  12. Ahmad Zubaidi Baharumshah & Siti Hamizah Mohd & Sung Ahn, 2009. "On the predictive power of monetary exchange rate model: the case of the Malaysian ringgit/US dollar rate," Applied Economics, Taylor & Francis Journals, vol. 41(14), pages 1761-1770.
  13. Lee Chin & M. Azali & Zulkornain Yusop & Mohammed Yusoff, 2007. "The monetary model of exchange rate: evidence from The Philippines," Applied Economics Letters, Taylor & Francis Journals, vol. 14(13), pages 993-997.
  14. Cheung, Yin-Wong & Lai, Kon S, 1993. "A Fractional Cointegration Analysis of Purchasing Power Parity," Journal of Business & Economic Statistics, American Statistical Association, vol. 11(1), pages 103-12, January.
  15. Long, Dara & Samreth, Sovannroeun, 2008. "The Monetary Model of Exchange Rate: Evidence from the Philippines Using ARDL Approach," MPRA Paper 9822, University Library of Munich, Germany.
  16. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
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