This article investigates the consequences of interest rate and inflation on exchange rate in the gambia, employing the dynamic model of fully modified ordinary least square fmols, dynamic. How does inflation affect the exchange rate between two. It examined the dependency of economic growth on foreign trade, exchange rate, inflation and foreign direct investment. In a similar study, akpan 2008 investigated foreign exchange. Moreover, exchange rate depreciation had no perceptible impact on industrial production in the short run but had positive impact in the long run. While exchange rates can be subject to myriad factors in intraday trading from market sentiment, breaking economic news, and crossborder trade and investment flows inflation and interest rate policy are often important indicators for exchange rate trends they can help traders gain an idea of what is likely to be a profitable trade for foreign exchange positions taken over longer periods. In this article we used three countries yearly exchange rates with their macroeconomic variables such as relative interest rates etc to study the impact they exert on exchange rates.
Pdf the effect of exchange rate and inflation on foreign. If such a stable longrun relationship does not exist, then depreciating the exchange rate does not seem to be a reasonable way to improve the. Impact of interest rate, inflation and money supply on exchange rate volatility in pakistan 1,2tariq mahmood ali, muhammad tariq mahmood and tariq bashir1 2 1fuuast school of economic sciences, federal urdu university of arts, science and technology, islamabad, pakistan 2pakistan council for science and technology, islamabad, pakistan. The exchange rate and inflation in the uk econstor.
The time series data of real gdp, nominal gdp, real effective exchange rate, prices and money supply for the period of 1973 to 2007 was used in the study. The balance of payments or supply side factors, relate to the effects of exchange rate movements on the price level. A study of the effect of inflation and exchange rate on. First, it establishes whether there is a stable longrun relationship between the exchange rate and the merchandise trade balance. The secondary data was obtained from the world bank, world development indicators wdi report available as at 31st december 2016. Also how exchange rate can influence inflation rate. The impact of exchange rate depreciation on infl ation in malaysia introduction the persistent depreciation of the ringgit since september 2014 has raised concerns about the risk of higher infl ation in malaysia. Pdf the impact of interest rate and inflation on the. Is bad news about inflation good news for the exchange rate. Abstract this paper examines the effect of inflation and economic growth on unemployment in sri lanka for the period 19902012. Therefore, according to portfolio adjustment theory, lower. Regression analysis was conducted to determine the significance of the regression coefficients. Impact of exchange rate on trade deficit and foreign. However, sustained inflation induces depreciation of the exchange rate but not as much.
Effect of the exchange rate on business economics help. Linear multiple regression has been used to find out the impact of inflation and exchange rate on stock market performance. However, the most widely used currencies in almost all transactions were the u. Some studies have been performed on monetary policy and its impact on the exchange rate both inside and outside the country, but they have not. To examine the impact of inflation on economic growth in tanzania over the period 19902011 ii. The effect of exchange rate and inflation on foreign direct investment and its relationship with economic growth in nigeria article pdf available march 2011 with 8,799 reads how we measure.
The concept of inflation inflation is one of the most frequently used terms in economic discussions, yet the concept is variously misconstrued. The study examined the effect of exchange rate and inflation on stock market returns in ghana using monthly inflation and exchange rate data obtained from the bank of ghana and monthly market returns computed from the gse allshare index from january 2000 to december 20. The gross domestic product growth is a long term rise in the capacity to supply increasingly diverse economic goods o its population. Article the impact of the exchange rate on inflation. The study concludes that inflation insignificantly influences. Therefore, this study, the determinants of inflation in nigeria, will be studied using monetary policy variables broad money supply, exchange rate, one year treasury bill rate and monetary policy rate. With the gradual rise in public expenditures and minimum capital generation in various developing states, different governments have reinstated towards domestic and foreign debt. Pdf the impact of gdp, inflation, interest and exchange. In this study, exchange rate systems were mentioned. Third, the way that direct exchange rate effects on import prices enter agents inflation expectations process is examined, as well as the implications of monetary. Impact of inflation and economic growth on unemployment in sri lanka. The research found that exchange rate depreciation, money supply and real gross domestic product are the main. In general, large and persistent exchange rate depreciation in a small. This research found that fdi follows economic growth, but the reverse is inconclusive.
Effect of inflation and interest rates on foreign exchange. Inflation has a negative impact, while the effect of exchange rate was debated. Asher 2012 examined the impact of exchange rate fluctuation on the nigeria economic growth for period of 1980 2010. Effect of inflation on the growth and development of the. Influence of macroeconomic variables on exchange rates. A simplified explanation of how inflation can affect the exchange rate. Empirical test of the relationship between exchange rate. The impact of monetary policy rate on inflation in nigeria. Research findings suggest there is a positive relationship between per capita income differential and exchange rate differential but there is a slight impact of per capita income differential on exchange rate between these two countries as there is a huge differences between the usa per capita income and pakistan per capita income, pakistan. The relationship between exchange rate2 and inflation rate is not a onetoone relation.
The problem of inflation in china can be called the key of chinese economic whether can further growth. The international fishers effect, the interest rate parity and the ppp theory are the major theoretical underpinnings, which expounds the interconnection between inflation, exchange rates and rates of interest. Pdf the paper investigates empirically the relationships between. It is the price of domestic currency in relation to foreign currency, i. Inflation is more likely to have a significant negative effect, rather than a significant positive effect, on a currency s value and foreign exchange rate. Alesina and summers 1993 prudent monetary management was also found to aid the reduction in the level and variability in inflation. This paper investigates whether exchange rate volatility impacts the commitment to inflation targeting monetary policy by analyzing thirteen emerging market economies and. The next chapter analyzes the economic situation of romania during 20052014 as revealed by indicators such as gdp, inflation, unemployment, exchange rate, the.
The rate of inflation in a country can have a major impact on the value of the countrys currency and the rates of foreign exchange it has with the currencies of other nations. Exchange rate effects and inflation targeting in a small open. To establish the relationship between inflation and gdp growth rate in. The result showed that real exchange rate has a positive effect on the economic growth. The rate of inflation in a country can have a major impact on the value of the countrys currency and the rates of foreign exchange it has with the currencies of. The impact of monetary policy on exchange rates during financial crises david m. The impact of exchange rate depreciation on infl ation in. The effects of exchange rate change on the trade balance. The impact of exchange rate fluctuation on the nigerian.
Introduction exchange rate is a key variable in the international trade. Pdf the relationship between exchange rate and inflation. Additionally, a low exchange rate passthrough is thought to provide greater freedom for pursuing an independent monetary policy and facilitates inflation targeting. The results from the regression analysis indicate that exchange rate and interest rate do not have significant impact on share price index while inflation rate exerts a significant negative. Article the impact of the exchange rate on inflation the exchange rate is one of several factors that influences inflation and is therefore important from the perspective of monetary policy. To measure the degree of responsiveness of tanzanian economic growth gdp to changes in the general price levels inflation rate. It was concluded that the real effective exchange rate has impact upon inflation in pakistan. This study has examined the impact of inflation on gdp and unemployment rate in pakistan. Finally, the results show money supply explained a very large proportion of variation in industrial production in nigeria. This paper focuses on developing stylized facts about the inflationary process in the gambia, focusing particularly on the relationship between the exchange rate regime and the sources of inflation. An empirical analysis 37 nepal has been following a pegged exchange rate system with indian rupee inr with periodic exchange rate corrections through revaluation or devaluation in the past. If turkey tightens its monetary policy, this will affect the exchange rate between the u. In discussing the implications of openness for inflation.
Those countries that experienced higher rates of inflation relative to others for a long period of time could not keep their exchange rates fixed. B imimole, a enoma 2011 examined the impact of exchange rate depreciation on inflation in nigeria for the period 19862008, using auto regressive distributed lag ardl cointegration procedure. One of the most controversial issues that has emerged in the aftermath of the asian financial crisis has been the appropriate response of monetary policy to sharp, destabilizing declines in currency values. If there is a depreciation in the exchange rate, it is likely to cause inflation to increase. June 2016, addis ababa annual inflation increased from 1. By including the money supply variable to var model the effects of money supply and the exchange rate on. The connection between the interest rate, the exchange rate and inflation is important due to their impact and volatility on the economical balance.
Effect of exchange rate and inflation on foreign direct. Impact of exchange rate on industrial production in. A weaker krona has contributed towards higher inflation. The impact of monetary policies on the exchange rate. The effect of the exchange rate on business depends on several factors. Experts in the field of macroeconomics were interviewed to gain a better understanding of these relationships and apply them in a south african context. Impact of interest rate, inflation and money supply on. The impact of monetary policies on exchange rate is important because the exchange rate is known as a channel in the direction of monetary shocks on the real sector of the economy. The above factors depict that the exchange rate channel sometimes moves in surprising directions by amplifying the effects of policies thereby complicating monetary policy. Nepal adopted different kind of exchange rate system for convertible. Study on the impact of inflation on the stock market in china. The bse sensex is used to assess the impact of demonetization.
A very low rate of inflation does not guarantee a favorable exchange rate for a country, but an extremely high inflation rate is very likely to impact the country s exchange rates with other. This study is to examine the impact of exchange rate on inflation in pakistan economy. Recently, prior to the exchange rate regime switch and the instability in the nominal exchange rates in february of 2001, the turkish economy had begun to suffer. If there is a depreciation in the value of the pound, the impact depends on the elasticity of demand. Exchange rate volatility is a stated concern for policymakers in many emerging market economies. To achieve this objective, secondary data has been taken from central bank annual reports for the. This study analysed the long run relationship between economic growth, foreign direct investment, foreign trade, inflation, exchange rate, imports and exports for the period of 19802011 using annual time series analysis. Impact of inflation and economic growth on unemployment in. Evaluation of changes in the exchange rate on business. Impact of inflation and exchange rate on stock market. The paper analyses the impact of demonetisation on stock market and foreign exchange rate. The effect of inflation, interest rates and exchange rates. The impact of exchange rate policy on inflation rate in an oil.
The impact of exchange rate volatility on inflation. Regression model was used to find out the impact of infla. Pdf this research looks at the inflationary effect of currency devaluation and its contractionary effect on real output growth in zimbabwe. Nifty return has been taken as dependent variable and exchange rate and inflation have been taken as independent variable. The relationship between exchage rates and inflation european. Even though exchange rate policy can help stop inflation, at least for a while.
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