Exchange Rate Determination Under Monetary Policy Rules in a Financially Underdeveloped Economy: A Simple Model and Application to Mozambique
AbstractMicrostructure aspects of nominal exchange rate determination are less relevant in countries with embryonic financial markets. In less-developed economies, trade in goods and services is a more significant driver of currency demand than financial market speculation or hedging; and central banks actively set monetary variables. We develop a simple variation of the standard monetary model of exchange rate determination, incorporating interest rate rules but not relying on interest rate parity; and study the effect of monetary fundamentals on the Mozambican exchange rate. We find a long-run relationship between fundamentals and exchange rates, with coefficient signs in regression equations consistent with theoretic predictions. Moreover, the monetary model outperforms a random walk in predicting metical exchange rates out-of-sample at the four-quarter horizon.
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Bibliographic InfoPaper provided by Economic Research Southern Africa in its series Working Papers with number 192.
Length: 21 pages
Date of creation: 2010
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Other versions of this item:
- Shakill Hassan & Félix Simione, 2013. "Exchange Rate Determination Under Monetary Policy Rules In A Financially Underdeveloped Economy: A Simple Model And Application To Mozambique," Journal of International Development, John Wiley & Sons, Ltd., vol. 25(4), pages 502-519, 05.
- NEP-ALL-2010-10-09 (All new papers)
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- NEP-OPM-2010-10-09 (Open Economy Macroeconomics)
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- Riané de Bruyn & Rangan Gupta & Lardo Stander, 2013.
"Testing the Monetary Model for Exchange Rate Determination in South Africa: Evidence from 101 Years of Data,"
University of Finance and Management in Warsaw, vol. 7(1), March.
- Riane de Bruyn & Rangan Gupta & Lardo stander, 2011. "Testing the Monetary Model for Exchange Rate Determination in South Africa: Evidence from 101 Years of Data," Working Papers 201134, University of Pretoria, Department of Economics.
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