More evidence on the asymmetric effects of exchange rate changes on the demand for money: evidence from Asian

ABSTRACT

We try to assess the impact of exchange rate changes on the demand for money in eight Asian countries. When we followed the previous literature and the standard linear Autoregressive Distributed Lag (ARDL) approach, we found exchange rate changes had no long-run significant effects in five out of the eight countries in our sample. However, when we applied the nonlinear ARDL approach and separated appreciations from depreciations, at least one of them or both had significant effects on the demand for money in India, Indonesia, Korea, the Philippines, and Singapore, supporting asymmetric effects of exchange rate changes. There was also evidence of short-run asymmetric effects.

KEYWORDS:

• Money demand
• exchange rate
• asymmetry effects
• nonlinear ARDL
• Asia

JEL CLASSIFICATION:

• F31
• E41

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ The models and methods in this section closely follows Bahmani-Oskooee, Xi, and Bahmani (2016).

² See Banerjee, Dolado, and Mestre (1998, Table 1).

³ Note that by way of construction, a decline in the nominal effective exchange rate signifies a depreciation.

⁴ In practice, POS at time t, is the cumulative sum of all changes in LnEX prior to time t (including t itself) where negative changes are replaced by zeroes. Similarly, NEG at time t, is the cumulative sum of all changes in LnEX, where positive changes are replaced by zeroes.

⁵ For this point see Shin, Yu and Greenwood-Nimmo (2014, p. 291).

⁶ For some other applications of these approaches see McFarlane, Das and Chowdhury (2014), Wimanda (2014), Baghestani and Kherfi (2015), Gogas and Pragidis (2015), Bahmani-Oskooee and Fariditavana (2015), Bahmani-Oskooee and Saha (2015), Lima et al. (2016), Al-Shayeb and Hatemi-J (2016), Nusair (2017), and Aftab et al. (2017).

⁷ Note that in some models the income elasticity is greater than one and it implies some diseconomies of scale in monetary policy. In these cases, to achieve 1% economic growth, money supply must increase by more than a 1% to accommodate the demand for money. In some cases, the income elasticity declines in nonlinear models and this could be due to introducing nonlinear adjustment of the exchange rate and its impact on domestic production or income. The inflation rate elasticity is also high in most models, implying that the money demand is too sensitive to inflation rate as compared to other variables. Thus, controlling inflation will being more stability to the money market.