Monetary model of exchange rate determination under floating and non-floating regimes
China Finance Review International
ISSN: 2044-1398
Article publication date: 31 July 2018
Issue publication date: 16 May 2019
Abstract
Purpose
The purpose of this paper is to empirically analyse how different exchange rate regimes affect the links between monetary fundamentals and exchange rates in Sub-Saharan Africa.
Design/methodology/approach
Using the Pedroni method for panel cointegration, mean group and pooled mean group and the panel vector autoregressive technique, this study empirically investigates whether monetary fundamentals impact exchange rates similarly in both regimes. Thus, the author acquires needed and credible empirical data.
Findings
The result suggests that the impact is dissimilar. In the floating regime, an increase in relative money supply and relative real output depreciates and appreciates the nominal exchange rate in the long run whereas in the non-floating regime, the evidence is mixed. Thus, exchange rates bear a theoretically consistent relationship with monetary fundamentals across SSA countries with floating regimes but fails under non-floating regimes. This provides evidence that regime choice is important if the relationship between monetary fundamentals and exchange rates in SSA are to be theoretically consistent.
Originality/value
This study empirically incorporates the dissimilarities in exchange rate regimes in a panel framework and study the links between exchange rates and monetary fundamentals. The focus on how exchange rate regimes might alter the equilibrium relationships between exchange rates and monetary fundamentals in SSA is a pioneering experiment.
Keywords
Citation
Ibhagui, O.W. (2019), "Monetary model of exchange rate determination under floating and non-floating regimes", China Finance Review International, Vol. 9 No. 2, pp. 254-283. https://doi.org/10.1108/CFRI-10-2017-0204
Publisher
:Emerald Publishing Limited
Copyright © 2018, Emerald Publishing Limited