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An Application of Asymmetric Toda–Yamamoto Causality on Exchange Rate-inflation Differentials in Emerging Economies

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Listed:
  • Mohammed Umar

    (Federal University Kashere, Nigeria)

  • Jauhari Dahalan

    (School of Economics, Finance and Banking, Universiti Utara Malaysia, Malaysia)

Abstract

The paper employs asymmetric causality test based on Toda and Yamamoto (1995) causality approach to further investigate the causal relationship between exchange rate and inflation differentials in Brunei, Malaysia and Singapore. We simulate critical values based on leverage bootstrapping and asymmetric causality test from the underlying empirical data. The results are compared among the Granger asymptotic Chi-square, the modified WALD leverage bootstrapped distributions and asymmetric causality test. The reported conflicting findings proved the existence of size distortion and nuisance parameter estimates when the traditional Granger approach is applied. The results from Toda–Yamamoto with asymmetric causality test establish the existence of Granger causality running from positive cumulative exchange rate shocks to positive cumulative shocks in inflation differentials for Brunei and Malaysia. However, the asymmetric causality for Singapore runs from both positive and negative cumulative domestic inflation shocks to positive and negative exchange rate shocks respectively. The policy implication of the findings is that a strong price stabilization policy during both good and bad times can stabilize exchange rate fluctuations in Singapore whereas; formulation of effective exchange rate policy can only achieve price stability in Brunei and Malaysia during good period.

Suggested Citation

  • Mohammed Umar & Jauhari Dahalan, 2016. "An Application of Asymmetric Toda–Yamamoto Causality on Exchange Rate-inflation Differentials in Emerging Economies," International Journal of Economics and Financial Issues, Econjournals, vol. 6(2), pages 420-426.
  • Handle: RePEc:eco:journ1:2016-02-8
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    References listed on IDEAS

    as
    1. A. C. Arize & J. Malindretos, 1997. "Effects of exchange-rate variability on inflation variability: some additional evidence," Applied Economics Letters, Taylor & Francis Journals, vol. 4(7), pages 453-457.
    2. John Cairns & Corrinne Ho & Robert McCauley, 2007. "Exchange rates and global volatility: implications for Asia-Pacific currencies," BIS Quarterly Review, Bank for International Settlements, March.
    3. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-1176, December.
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    Cited by:

    1. Gunay, Samet, 2020. "Seeking causality between liquidity risk and credit risk: TED-OIS spreads and CDS indexes," Research in International Business and Finance, Elsevier, vol. 52(C).
    2. Mehtap TUNÇ & Abdullah AÇI, 2019. "The Impact of Steel Price on Ship Demolition Prices: Evidence from Heterogeneous Panel of Developing Countries," Sosyoekonomi Journal, Sosyoekonomi Society, issue 27(42).

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    More about this item

    Keywords

    Asymmetric Causality; Leverage Bootstrap; Toda–Yamamoto; Exchange Rate; Structural Break;
    All these keywords.

    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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