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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Main Author:	Liew, Khim Sen
Format:	Thesis
Language:	English English
Published:	2008
Subjects:	Foreign exchange rates Monetary policy - Asean countries
Online Access:	http://psasir.upm.edu.my/id/eprint/5055/1/FEP_2008_3.pdf
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spelling	my-upm-ir.50552013-05-27T07:20:05Z Non-Linearity In Monetary Models Of Exchange Rate In Five Asean Countries 2008 Liew, Khim Sen 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. Foreign exchange rates Monetary policy - Asean countries 2008 Thesis http://psasir.upm.edu.my/id/eprint/5055/ http://psasir.upm.edu.my/id/eprint/5055/1/FEP_2008_3.pdf application/pdf en public phd doctoral Universiti Putra Malaysia Foreign exchange rates Monetary policy - Asean countries Faculty Economics and Management English
institution	Universiti Putra Malaysia
collection	PSAS Institutional Repository
language	English English
topic	Foreign exchange rates Monetary policy - Asean countries
spellingShingle	Foreign exchange rates Monetary policy - Asean countries Liew, Khim Sen Non-Linearity In Monetary Models Of Exchange Rate In Five Asean Countries
description	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.
format	Thesis
qualification_name	Doctor of Philosophy (PhD.)
qualification_level	Doctorate
author	Liew, Khim Sen
author_facet	Liew, Khim Sen
author_sort	Liew, Khim Sen
title	Non-Linearity In Monetary Models Of Exchange Rate In Five Asean Countries
title_short	Non-Linearity In Monetary Models Of Exchange Rate In Five Asean Countries
title_full	Non-Linearity In Monetary Models Of Exchange Rate In Five Asean Countries
title_fullStr	Non-Linearity In Monetary Models Of Exchange Rate In Five Asean Countries
title_full_unstemmed	Non-Linearity In Monetary Models Of Exchange Rate In Five Asean Countries
title_sort	non-linearity in monetary models of exchange rate in five asean countries
granting_institution	Universiti Putra Malaysia
granting_department	Faculty Economics and Management
publishDate	2008
url	http://psasir.upm.edu.my/id/eprint/5055/1/FEP_2008_3.pdf
_version_	1747810341024169984

Non-Linearity In Monetary Models Of Exchange Rate In Five Asean Countries

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