THE EFFECTS OF INTEREST RATE ON REAL EFFECTIVE EXCHANGE RATE VOLATILITY SPILLOVER IN MALAYSIA AND THAILAND: EMPIRICAL EVIDENCE

Authors

  • Mohd Jaffri Abu Bakar Universiti Teknologi Malaysia
  • Nanthakumar Loganathan Universiti Teknologi Malaysia
  • Asan Ali Golam Hassan Universiti Teknologi Malaysia
  • Tirta Nugraha Mursitama Bina Nusantara University

DOI:

https://doi.org/10.21512/jas.v9i2.7517

Keywords:

asymmetric analysis, interest rate, nonlinear causality, real effective exchange rate

Abstract

The research examined this asymmetric effect between the interrelationship of the interbank rate on the external competitiveness purchasing power represented by the real effective exchange rate for Malaysia and Thailand using monthly data covering the period of 1994 until 2020. The empirical findings confirms an asymmetric effect between interbank rate and real effective exchange rate based on the nonlinear autoregressive distributed lag estimates. The research also finds a unidirectional asymmetric causal relationship running from real effective exchange rate on interbank rate Thailand, which indicate the monetary policy has a direct relationship on interbank rate volatility. While in Malaysia, there is no causality running between both variables since the country has proposed several soft monetary policies and more concentrating on the short-term borrowing by improving the tight money supply circulation based on the domestic inflation, global economic, and financial market volatility. Therefore, the research recommends a specific need of monetary stabilizer policy to stabilize both countries’ currencies and put more effort to liberalize the foreign exchange rate system in a globalized economy.

Dimensions

Plum Analytics

Author Biographies

Mohd Jaffri Abu Bakar, Universiti Teknologi Malaysia

Mohd Jaffri Abu Bakar

Azman Hashim International Business School

Universiti Teknologi Malaysia

54100 Kuala Lumpur, Malaysia

Email: mohdjaffri@graduate.utm.my

Asan Ali Golam Hassan, Universiti Teknologi Malaysia

Asan Ali Golam Hassan

Azman Hashim International Business School

Universiti Teknologi Malaysia

54100 Kuala Lumpur, Malaysia

Email: asanali@utm.my

References

Abdoh, M. M. Y., Yusof, M. N. H., Zulkifli, M. S. A, Bulot, N., & Ibrahim, N. J. (2016). Macroeconomic factors that influence exchange rate fluctuation in ASEAN countries. International Academic Research Journal of Social Science, 2(1), 89-94.

AbuDalu, A. & Ahmed, E. M. (2014). The determinants of ASEAN-5 real effective exchange rate vis-ávis the UK pound. World Journal of Entrepreneurship, Management and Sustainable Development, 10(2), 98-118.

Adler, K. & Grisse, C. (2014). Real exchange rates and fundamentals: Robustness across alternative model specifications. SNB Working Papers 7/2014.

Ahmed, H. F. T. & Mazlan, N. S. (2021). The impact of interest rate on exchange rate within ASEAN countries: Evidence from linear and nonlinear framewirks. Global Journal of Emerging Market Economies, 13(1), 7-34. https://doi.org/10.1177%2F0974910120974798

Aizenman, J., Chinn, M. D., & Ito, H. (2016). Monetary policy spillovers and the trilemma in the new normal: Periphery country sensitivity to core country conditions. Journal of International Money and Finance, 68, 298-330. https://doi.org/10.1016/j.jimonfin.2016.02.008

Aizeman, J., Hutchison, M., & Noy, I. (2011). Inflation targeting and real exchange rates in Emerging markets. World Development, 39(5), 712-724.

Alsamara, M., & Mrabet, Z. (2019). Asymmetric impacts of foreign exchange rate on the demand for money in Turkey: New evidence from nonlinear ARDL. International Economics and Economic Policy, 16(2), 335-356. https://doi.org/10.1007/s10368-018-0421-y

Andonov, A., Bauer, R. M., & Cremers, K. M. (2017). Pension fund asset allocation and liability discount rates. Review of Financial Studies, 30(8), 2555-2595. https://dx.doi.org/10.2139/ssrn.2070054

Andries¸, A. M., Capraru, B., Ihnatov, I., & Tiwari, A. K. (2017). The relationship between exchange rates and interest rates in a small open emerging economy: The case of Romania. Economic Modelling, 67, 261-274. https://doi.org/10.1016/j.econmod.2016.12.025

Ariff, M. & Yap, Meow-Chung, M. (2001) Financial crisis in Malaysia. In T.-S. Yu and D. Xu (Eds.), East Asia Rising Again. Singapore: World Scientific Publishing.

Bagchi, D., Chortareas, G. E., & Miller, S. M. (2004). The real exchange rate in small, open developed economies: Evidence from cointegration analysis. Economic Record, 80(248), 76-88. https://doi.org/10.1111/j.1475-4932.2004.00126.x

Balduzzi, P. & Chiang, I. E. (2020). Real exchange rate and currency risk premiums. The Review of Asset Pricing Studies, 10(1), 94-121.

Bank of Thailand (2020). Development of monetary policy framework in Thailand. https://www.bot.or.th/English/MonetaryPolicy/MonetPolicyKnowledge/Pages/Framework.aspx

Bank of Thailand. (2021). Interest rates. https://www.bot.or.th/english/statistics/_layouts/application/interest_rate/in_rate.aspx

Barbosa, L. O. S., Jayme, F. G. Jr., & Missio, F. J. (2018). Determinants of the real exchange rate in the long-run for developing and emerging countries: A theoretical and empirical approach. International Review of Applied Economics, 32(1), 62-83. https://doi.org/10.1080/02692171.2017.1332017

Bartolli, L. (1995). Purchasing power parity measures of competitiveness. Finance and Department, 32(3), 46-49. https://doi.org/10.5089/9781451952193.022

Bowe, M., & Saltvedt, T. M. (2004). Currency invoicing practices, exchange rate volatility and pricing to market: Evidence from product level data. International Business Review, 13(3), 281-308. https://doi.org/10.1016/j.ibusrev.2004.01.003

Brailsford, T., Penm, J. H. W., & Lai, C. D. (2006). Effectiveness of high interest rate policy on exchange rates: A reexamination of the Asian financial crisis. Advances in Decision Sciences, 4, 1-9. https://doi.org/10.1155/JAMDS/2006/35752

Capasso, S., Napolitano, O., & Jiménez, V. A. L. (2019). The long run interrelationship between exchange rate and interest rate; the case of Mexico. Journal of Economic Studies, 46(7), 1380-1397. https://doi.org/10.1108/JES-04-2019-0176

Cecchetti, S. G., Grifoli, T. M., Narita, M., & Sahay, R. (2020). US or domestic monetary policy: Which matters more for financial and stability? IMF Economic Review, 68, 35-65. https://doi.org/10.1057/s41308-020-00108-2

Central Bank of Malaysia. (2021). Interest rates and volumes. https://www.bnm.gov.my/interest-rates-volumes

Cheong, L. M. (2005). Globalization and the operation of monetary policy in Malaysia. BIS Papers, 23, 209-215.

Chowdhury, K. (2012). Modelling the dynamics, structural breaks and the determinants of the real exchange rate of Australia. International Financial, Markets, Institution and Money, 22(2), 343-358. http://dx.doi.org/10.1016/j.intfin.2011.10.004

Cobham, D. (2021). A comprehensive classification of monetary policy frameworks in advanced and emerging economies. Oxford Economic Papers, 73(1), 2-26. https://doi.org/10.1093/oep/gpz056

Curran, M., & Velic, A. (2019). Real exchange rate persistence and country characteristics: A global analysis. Journal of International Money and Finance, 97, 35-56. https://doi.org/10.1016/j.jimonfin.2019.06.001

Data and analytics. (2021). J. P. Morgan. https://www.jpmorgan.com/solutions/cib/securities-services/data-analytics

Dickey, D. A., & Fuller, W. A. (1981). Likelihood ratio statistics for autoregressive time series with a unit root. Econometrica, 49(4), 1057–1072. https://doi.org/10.2307/1912517

Draz, M., Ahmad, F., Gupta, B., & Amin, W. (2019). Macroeconomic fundamentals and exchange rates in South Asian economies. Journal of Chinese Economic and Foreign Trade Studies, 12(2), 104-119. https://doi.org/10.1108/JCEFTS-01-2019-0007

Enders, W., & Lee, J. (2012). The flexible fourier form and Dickey-Fuller type unit root tests. Economics Letters, 117(1), 196–199. https://doi.org/10.1016/j.econlet.2012.04.081

Engel, C. (2019). Real exchange rate convergence: The roles of price stickiness and monetary policy. Journal of Monetary Economics, 103, 21-32. https://doi.org/10.1016/j.jmoneco.2018.08.007

Furman, J., Stiglitz, J. E., Bosworth, B. P., & Radele, S. (1998). Economic crises: Evidence and insights from East Asia. Brookings Papers on Economic Activity, 2, 1-135.

Golit, P., Salisu, A., Akintola, A., Nsonwu, F., & Umoren, I. (2019). Exchange rate and interest rate differential in G7 Economies. Bulletin of Monetary Economics and Banking, 22(3), 263-286. http://dx.doi.org/10.21098/bemp.v22i3.1147

Gozgor, G. (2014). Causal relation between economic growth and domestic credit in the economic globalization: Evidence from the Hatemi-J’s test. The Journal of International Trade & Economic Development, 24(3), 395-408. https://doi.org/10.1080/09638199.2014.908325

Granville, B., & Mallick, S. (2010). Monetary policy in Russia: Identifying exchange rate shocks. Economic Modelling, 27(1), 432-444. https://doi.org/10.1016/j.econmod.2009.10.010

Hanson, S. G. & Stein J. C. (2015). Monetary policy and long-term real rates. Journal of Financial Economics, 115, 429-448. http://dx.doi.org/10.1016/j.jfineco.2014.11.001

Hatemi-J, A. (2012). Asymmetric causality tests with an application. Empirical Economic, 43, 447-456. https://doi.org/10.1007/s00181-011-0484-x

Hnatkovska, V., Lahiri, A., & Vegh, C. A. (2013). Interest rate and the exchange rate: A non-monotonic tale. European Economic Review, 63, 68-93. https://doi.org/10.1016/j.euroecorev.2013.06.001

Hoang, V., Nguyen, D. K., & Pham, T. A. (2020). On the effects of monetary policy in Vietnam: Evidence from a trilemma analysis. The World Economy, 1-34. https://doi.org/10.1111/twec.13025

Hossain, A. A. (2017). Monetary policy for maintaining low, stable inflation in Malaysia. The Journal of Developing Areas, 51(2), 381-404. https://doi.org/10.1353/jda.2017.0052

Kalemli-Ozcan, S. & Varela, L. (2019). Exchange Rate and Interest Rate Disconnect: The Role of Capital Flows, Currency Risk and Default Risk. Meeting Papers 351, Society for Economics Dynamics

Karamelikli, H. & Karimi, M. S. (2020). Asymmetric relationship between interest rates and exchange rate: Evidence from Turkey. International Journal of Finance and Economics, 1-11. https://doi.org/10.1002/ijfe.2213

Katrakilidis, C. & Trachanas, E. (2012). What drives housing price dynamics in Greece: New evidence from asymmetric ARDL cointegration. Economic Modelling, 29(4), 1064-1069. https://doi.org/10.1016/j.econmod.2012.03.029

Kayhan, S., Bayat, T., & Ugur, A. (2013). Interest rates and exchange rate relationship in BRIC-T countries. Ege Academic Review, 13(2), 227-236.

Khin, A. A., Yee, C. Y., Seng, L. S., Wan, C. M., & Xian, G. Q. (2017). Exchange rate volatility on macroeconomic determinants in Malaysia: Vector error correction method (VECM) model. Journal of Global Business and Social Entrepreneurship, 3(5), 36-45.

Kia, A. (2013). Determinants of the real exchange rate in a small open economy: Evidence from Canada. Journal of International Financial Markets, Institutions and Money, 23, 163-178. https://doi.org/10.1016/j.intfin.2012.09.001

Kwiatkowski, D., Phillips, P. C. B., Schmidt, P., & Shin, Y. (1992). Testing the null hypothesis of stationarity against the alternative of a unit root. Journal of Econometrics, 54(1-3), 159-178. https://doi.org/10.1016/0304-4076(92)90104-Y

McCauley, R. N. (2006). Understanding monetary policy in Malaysia and Thailand: Objectives, instruments and independence. BIS Papers chapters. In Bank for International Settlements (Ed.), Monetary Policy in Asia: Approaches and Implementation, 31, 172-196.

Nguyen, D.K., Sousa, R.M., & Uddin, G.S. (2015). Testing for asymmetric causality between U.S. equity returns and commodity futures returns. Finance Research Letters, 12, 38-47. https://doi.org/10.1016/j.frl.2014.12.002

Nguyen, N., Harvie, C., & Suardi, S. (2020). ASEAN income gap and the optimal exchange rate regime. Applied Economics, 52(3), 1-17. https://doi.org/10.1080/00036846.2019.1645278

Oliver, V. (1997). Early beginnings of the beginning of the quantity theory of money and their context in Polish and Prussian monetary policies. Economic History Reviews, 50(3), 430-449. https://doi.org/10.1111/1468-0289.00063

Patel, D. & Mah, G. (2018). Relationship between real exchange rate and economic growth: the case of South Africa. Journal of Economics and Behavioral Studies, 10(1), 146-158. https://doi.org/10.22610/jebs.v10i1(J).2098

Pattanaik, S. & Mitra, K. A. (2001). Interest rate defense of exchange rate: Tale of the Indian rupee. Economic and Political Weekly, 36, (46/47), 4418-4427.

Perron, P. (1989). The great crash, the oil price shock, and the unit root hypothesis. Econometrica, 57, 1361-1401. https://doi.org/10.2307/1913712

Pesaran, M. H., Shin, Y., & Smith, R. J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16, 289-326. https://doi.org/10.1002/jae.616

Phuc, N. V., & Duc, V. H. (2019). Macroeconomics determinants of exchange rate pass-through: New evidence from the Asia-Pacific region. Emerging Markets Finance and Trade, 1-16. https://doi.org/10.1080/1540496X.2018.1534682

Saraç, T. B. & Karagöz, K. (2016). Impact of short-term interest rate on exchange rate: The case of Turkey. Procedia Economics and Finance, 38, 195-202. https://doi.org/10.1016/S2212-5671(16)30190-3

Shin, Y., Yu, B., & Greenwood-Nimmo, M. (2014). Modelling Asymmetric Cointegration and Dynamic Multipliers in a Nonlinear ARDL Framework. In W. Horrace, & R. Sickles (Eds.), The Festschrift in Honor of Peter Schmidt: Econometric Methods and Applications (pp. 281-314). Springer.

Sun, W. & De, K. (2019). Real exchange rate, monetary policy, and the U.S. economy: Evidence from a FAVAR model. Economic Inquiry, 57(1), 552-568. https://doi.org/10.1111/ecin.12723

Tari, R. & Abasiz, T. (2009). Frequency domain approach and short-run and long run causality test: Evidence from Turkey for interest rate and exchange rate relationship. METU Studies in Development, 36(2), 405-421.

Timeline: Thailand’s turbulent politics over two decades. (2019, March 22). Reuters. https://www.reuters.com/article/us-thailand-election-timeline-idUSKCN1R30HR

Verico, K. (2017). The key factors of economic integration in Southeast Asia: Case of Indonesia, Malaysia and Thailand. Journal of ASEAN Studies, 4(2), 107-126.

Yakubu, Z., Loganathan, N., Sethi, N., & Golam Hassan, A. A. (2021). Do financial development, trade openness and political stability complement for Egypt’s economic growth? Journal of International Commerce, Economics and Policy, 12(1). https://doi.org/10.1142/S1793993321500010

World Bank. (2021). World Development Indicators. Retrieved from http: www.worldbank.org.

Malaysia: December 2001. (2001, December 05). World Trade Organization. https://www.wto.org/english/tratop_e/tpr_e/tp180_e.htm

Wu, J. L. & Chen, S. L. (1998). A re-examination of real interest rate parity. The Canadian Journal of Economics, 837-851.

Downloads

Published

2021-12-30
Abstract 1031  .
PDF downloaded 631  .