Dynamic Heterogeneous Panel Analysis Of The Correlation Between Stock Prices And Exchange Rates Pdf

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This study aims to reconsider the relationship between exchange rate and stock market returns for selected emerging countries. The quantile-on-quantile approach is employed to present an inclusive and detailed image of the association between the variables under investigation.

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A sustained high growth rate of gross domestic product at a low inflation is one of the main goals of the majority of macroeconomic policies, so keeping the price stability plays an important role in determining the growth rate of output.

This paper empirically investigates effects of fiscal deficit and broad money M2 supply on inflation in Asian countries, namely Bangladesh, Cambodia, Indonesia, Malaysia, Pakistan, Philippines, Sri Lanka, Thailand, and Vietnam in the period of By applying the Pooled Mean Group PMG estimation-based error correction model and the panel differenced GMM General Method of Moment Arellano-Bond estimator, the study finds out broad money M2 supply has significantly positive impact on inflation only in the method of PMG estimation whereas fiscal deficit, government expenditure and interest rate are the statistically significant determinants of inflation in both methods of estimation.

A major objective of macroeconomic policies is to foster economic growth and to keep inflation on a low level. The stability of price is one of the factors in determining the growth rate of an economy; hence, the monetary authorities of many countries implement monetary policies to maintain inflation at a desirable rate.

A very high inflation affects the economy drastically, but there is some evidence that moderate inflation also slows down growth Temple, However, the high level of inflation stems from not only instruments of monetary policy money supply, interest rate, etc.

Most of selected Asian countries have high relatively levels of fiscal deficit and money supply as governments increase spending to foster economic growth and create employment. According to Asian Development Bank , the average shares of budget deficit and broad money M2 supply to GDP in in these countries is By new econometric techniques, the study will define significant determinants of inflation in order to suggest some recommendations about macroeconomic policies related to inflation.

The purpose of this paper is to apply the PMG-based error correction model and the panel differenced GMM Arellano-Bond estimation to investigate effects of fiscal deficit and broad money M2 supply on inflation in Asian countries, namely Bangladesh, Cambodia, Indonesia, Malaysia, Pakistan, Philippines, Sri Lanka, Thailand, and Vietnam in the period of — The remainder of this paper will be proceed as follows: Section 2 outlines a review of literature about effects of fiscal deficit and money supply on inflation; Section 3 describes the methodology and data; Section 4 presents results and discussion, and the final section is the conclusion and policy implications.

Several studies have exploited both the time and cross-sectional dimensions of data panel data to examine the relationship between fiscal deficits and inflation. Karras investigates the effects of budget deficits on money growth, inflation, investment and real output growth using annual data from a sample of 32 countries in the period of and finds that deficits are not inflationary. However, Cottarelli et al. Fischer et al. It is shown that, empirically, deficits have an impact on inflation and such an impact is stronger in high-inflation or developing countries.

Lin and Chu applies the dynamic panel quartile regression DPQR model under the autoregressive distributional lag ARDL specification, and examines the deficit-inflation relationship in 91 countries from to The DPQR model estimates the impact of deficits on inflation at various inflation levels and allows for a dynamic adjustment with the ARDL specification. The empirical results note that the fiscal deficit has a strong impact on inflation in high-inflation episodes, and has a weak impact in low-inflation episodes.

Jayaraman and Chen investigates the relationship between budget deficits and inflation in the four Pacific Island countries PICs by undertaking an empirical study of relationship between budget deficits in the four PICs through a panel econometric analysis. A multivariate framework is adopted with a view to avoiding bias arising out of omission of relevant variables and the methodology employed for estimating a long-run relationship between budget deficits and inflation is the Westerlund error correction based panel co-integration test procedure.

The study's findings confirm the existence of a strong, direct relationship between budget deficits and inflation in all four PICs. Most of empirical studies confirm a strong impact of money supply on inflation. The study shows that there is a high almost unity correlation between the rate of growth of the money supply and the rate of inflation in long term. With regard to the relationship between money and prices, King shows that the strong correlation between them disappears as the time horizon shortens indicating that the effects of money growth should emerge in the changes in real variables.

According to Walsh , the high correlation between inflation and the growth rate of money supply supports the quantity-theoretic argument that the growth of money supply leads to an equal rise in the price level.

Nassar uses a two-sector model to estimate the relationship between prices, money, and the exchange rate for quarterly data in Madagascar in the period of The results show that the money supply has significantly positive impact on inflation. Oomes and Ohnsorge investigates the impact of money demand on inflation for monthly data in Russia from April to January by using the error correction model.

The results confirm that an excess supply of effective broad money is inflationary while other excess money measures are not and that effective broad money growth has the strongest and most persistent effect on short-run inflation.

Pelipas empirically investigates the money demand and inflation Belarus on the basis of the quarterly data for Using co-integrated VAR and equilibrium correction model, the study notes the money supply is significantly positive correlated with inflation. Hossain investigates the behavior of broad money demand in Bangladesh using annual data over the period of by using the Johansen co-integration test and the error correction model. Empirical results suggest the existence of a causal relationship between money supply growth and inflation.

Pesaran et al. It is one advantage of PMG estimator. Furthermore, the PMG estimator highlights the adjustment dynamic between the short-run and the long-run.

The heterogeneity of short-run slope coefficients allows the dynamic specification to differ across countries. However, the drawback of PMG estimator is that it cannot deal with the endogeneity of variables in the model. The PMG estimation-based error correction model requires an existence of co-integration between dependent variable and explanatory variables. So, the study first tests the stationary of the variables by using the Fisher tests, developed by Maddala and Wu and then applies the co-integration test of Westerlund The dynamic panel GMM estimation uses the appropriate lags of the instrumented variables to generate internal instruments and employs the pooled dimension of the panel data.

So it does not put restrictions on the length of each individual time dimension in the panel. This enables use of suitable lag structure to exploit the dynamic specification of the data.

However, this approach still has some important shortcomings Anshasy, First, it only allows the intercepts —not slopes— to vary across groups. Second, cross-sectional dependence is not addressed. The dynamic characteristics in 2 show that the country-specific fixed effects can be correlated with the lagged dependent variable and some explanatory variables may be endogenous.

It can make OLS inconsistency and estimates bias. It utilizes the lagged differences of the predetermined variable as instruments for their levels and the differences of the strictly exogenous variables as in the standard IV procedure. The descriptive statistics of all variables is described in the Table 1.

Author elaboration software output. The matrix of Pearson correlation coefficients is summarized in Table 2. The results show that the pair of broad money M2 supply and trade openness has the biggest coefficient 0. According to Evans , the correlation level between them is relatively strong while that of others are moderate and weak.

However, for the time series in finance, the correlation coefficient, lower than 0. Therefore, the study decides to use these all variables in the model. The matrix of Pearson correlation coefficients. As mentioned in the Section 3 of Methodology and data, this paper applies the PMG estimation—based error correction model to analyse the effects of fiscal deficit and broad money M2 supply on inflation. Before carrying out it, the stationary tests and co-integration tests need to be done to make sure that all variables in the model are co-integrated.

It means that in this model some variables have integration of zero order I 0 and the others integration of first order I 1. Therefore, the study follows the Westerlund co-integration tests for dependent variable inflation and explanatory variables the remaining variables. Table 4 presents Westerlund panel co-integration tests. When all four tests reject the null of no co-integration, a covariate is considered co-integrated with the dependent variable.

So the results show that fiscal deficit, broad money M2 supply, real GDP per capita, government expenditure, interest rate, exchange rate and trade openness are co-integrated with inflation. Westerlund panel co-integration tests. Normalized variable: Inflation. The estimation of PMG-based error correction model is expressed in Table 5. Impacts of fiscal deficit and broad money M2 supply on inflation are consistent with previous empirical studies.

In fact, Fischer et al. Therefore, an increase in fiscal deficits as well as in government expenditure, two important instruments of fiscal policy, lead to high inflation. However, the influence of interest rate on inflation can be explained in two ways. One is based on cost of capital.

This changes raise inflation by shifting the aggregate supply curve to the left side. The second, the changing interest rate impacts on inflation through influencing the money volume. In the endogenous money models which money supply is a function of interest rate, the money supply is increased when interest rate goes up.

So, according to quantity theory of money, the more money supply results in inflation in the short and long run. In short run, broad money M2 supply, government expenditure and interest rate are significant determinants of inflation. Accordingly, the speed of adjustment in the short run to reach equilibrium level in the long run is To confirm whether the above results of PMG estimator is reliable or not, the study continues to follow the differenced panel GMM Arellano-Bond estimations. The estimated results are outlined in Table 6.

Dependent variable: Inflation. Accordingly, this estimation begins at Model 1, then continues with Model 2 and ends at Model 3 the full variables model. All results from Model 1, 2, 3 show that estimated coefficients are approximately unchanged. It confirmed that results of the panel GMM estimation are strongly robust. Except for impact of broad money M2, effects of fiscal deficit, government expenditure and interest rate on inflation are completely consistent with the estimated results of PMG estimator, implying the impact of broad money M2 on inflation is not significant in panel GMM estimation.

Accordingly, increase in money supply does not necessarily cause inflation. With increase in money supply interest rate is likely to fall and decline in interest rate may lead to higher investment and output and in that case money supply is not inflationary. The study applied two methods of estimation, the PMG estimation and the differenced panel GMM Arellano-Bond estimation, to analyze the effects of fiscal deficit and broad money M2 supply on inflation in Asian countries, namely Bangladesh, Cambodia, Indonesia, Malaysia, Pakistan, Philippines, Sri Lanka, Thailand, and Vietnam in the period of The estimated results show that broad money M2 supply has significantly positive impact on inflation only in the method of PMG estimation whereas fiscal deficit, government expenditure and interest rate are the statistically significant determinants of inflation in both methods of estimation.

The policy implications of empirical results are very clear.

Unit Roots and Cointegration in Panels

Hence, we are including articles written in both languages, English and Spanish, broadening our scope to a larger audience. The Journal of Economics Finance and Administrative Science aims to provide the most relevant research and current developments in all the fields of the administrative sciences worldwide. In order to accomplish our purpose, the articles go through a rigorous process of evaluation and selection, according to international editorial conventions. The Universidad ESAN, with more than 50 years of experience in the higher education field and post graduate studies, desires to contribute to the academic community with the most outstanding pieces of research. We gratefully welcome suggestions and contributions from our readers in order to help us hit our goals. SRJ is a prestige metric based on the idea that not all citations are the same. SJR uses a similar algorithm as the Google page rank; it provides a quantitative and qualitative measure of the journal's impact.

The Causal Relationship between Stock Prices and Exchange Rates: Evidence from the G-7

Citation: Ngo Thai Hung. AIMS Energy, , 7 4 : Article views PDF downloads Cited by 1.

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Skip to search form Skip to main content You are currently offline. Some features of the site may not work correctly. We examine the nexus of stock prices and exchange rates for the G-7 countries by using the vector error correction model, the bounds testing methodology and linear and non-linear Granger causality methods. The empirical results substantiate that a long-run level equilibrium relationship exists among the exchange rates and stock prices for the UK and France. Save to Library.

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