Prepared by: Shelly Robinson

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• Prepared by Shelly Robinson

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PROBLEM DESCRIPTION

• Why do countries with similar currencies have
  different exchange rates?
• How does money supply affect the value of a
  countrys exchange rate?

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LITERATURE REVIEW

• Seminal Paper
• Testing the monetary model of exchange rate
• determination a closer look at panels
• (Rapach 2004)
• Additional Research
• Currency Fluctuations in the Post-Bretton Woods
  Era.
• (Meese 1990)
• What Determines the Nominal Exchange Rate? Some
  Cross-Sectional Evidence
• (Lane 1999)

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THEORY
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THEORY
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THEORY

• Null Hypothesis
• Fluctuations in exchange rates are not related to
  fluctuations in money supply
• Alternative Hypothesis
• Fluctuations in exchange rates are related to
  fluctuations in money supply

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DATA

• Quarterly data Q1 1988 Q3 2005
• 18 years, 3 countries
• Dependent Variable
• Exchange Rate
• Dollar value as compared to Yen
• Independent Variables
• Money Supply
• Interest Rates
• GDP, CPI, BoP
• All data retrieved from each countrys respective
  World/Central Bank websites

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EMPIRICAL MODEL

• Bivariate
• Yer a (ß m1) e
• Multivariate
• Yer a (ß1 m1) (ß2 i) (ß3 GDP) (ß4
  CPI) (ß5 BoP) e

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RESULTS

• New Zealand
• ER 77.095 - 0.261m1
• ER -280.159 - 4.148m1 0.023i 1.028GDP
• 3.083CPI - 0.385BoP
• T-stats 3.271, 0.134, 2.242, 3.013, -1.846
• R2 0.473

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RESULTS

• Australia
• ER 102.847 - 0.190m1
• ER -22.182 - 1.261m1 0.829i 0.729GDP
• 0.644CPI 0.100BoP
• T-stats -1.650, 7.227, 0.856, 1.916, 0.815
• R2 0.694

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RESULTS

• United States
• ER 132.869 - 0.032m1
• ER -16.480 - 6.365m1- 0.870i 8.405GDP
• 0.188CPI 2.558BoP
• T-stats -4.823, -4.171, 4.047, 0.101, 4.323
• R2 0.442

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INTERPRETATION OF RESULTS

• Exchange rates are a negative function of money
  supply
• Each country has a different monetary policy
  which affects exchange rates differently
• Too much correlation between the independent
  variables

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FUTURE RESEARCH

• More countries
• Longer data span for the countries examined