Macroeconomic factors and their impacts on exchange rates dynamics Essay

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Chapter 3: RESEARCH METHODOLOGY

3.1Introduction

This chapter consisted of all the methodological analysiss that have to be carried out as to accomplish the aims of the survey. First of wholly, a theoretical model is designed, followed by the hypothesis development that describe how each independent variable is linked to the dependant variables based on the literature reappraisal in old chapter. The undermentioned sub-chapters include the research design that highlights the intent of survey, type of probe, research intervention, survey puting and unit of analysis of research. Following, there will be the population and trying design that describes the sample choice from the population, the informations aggregation methods and grounds ; so the research instruments that describes the variables proxy, computation expressions and beginnings of informations ; and the theoretical account specification that presents the equation for arrested development analysis. Last but non least, the chapter introduces the type of informations analysis to be carried out such as cogency analysis, descriptive statistics and pooled OLS arrested development analysis on the information collected.

3.2Research Model

The reviewed of assorted exchange rate theoretical accounts from the published diaries and articles in sub-chapter 2.3 and 2.4 with the geographic expedition of assorted macroeconomics factors and their impacts on exchange rates kineticss has helped to develop the theoretical model and hypotheses of this survey. The building of model has been discussed in item in sub-chapter 2.3.6 while Figure 3.1 showed the proposed research model of the macroeconomic determiners of exchange rate ( NER and NEER ) .

Figure 3.1: Proposed research model of macroeconomics determiners of exchange rate

3.3Research Hypotheses:

Hypothesiss will be developed in order to place if the theory formulated is valid or non after the theoretical model has been formed in old subdivision. Therefore, the hypotheses which have been developed in this survey are as below:

H1:There isimportant negative relationshipbetween therising prices derived functionand exchange rate of ASEAN states.

H2:There isimportant relationshipbetween theinvolvement rate derived functionand exchange rate of ASEAN states.

H3:There isimportant negative relationshipbetween themoney enlargementand exchange rate of ASEAN states.

H4:There isimportant positive relationshipbetween theproductiveness degreeand exchange rate of ASEAN states.

H5:There isimportant negative relationshipbetween thefootings of tradeand exchange rate of ASEAN states.

H6:There isimportant relationshipbetween thenet foreign assetsand domestic exchange rate of ASEAN states.

H7:There isimportant positive relationshipbetween thetrade balanceand exchange rate of ASEAN states.

H8:There isimportant negative relationshipbetween thetrade opennessand exchange rate of ASEAN states in long-run whileimportant positive relationshipbetween thetrade opennessand exchange rate of ASEAN states.

H9:There isimportant positive relationshipbetween theforeign modestyand exchange rate of ASEAN states.

H10:There isimportant negative relationshipbetween theexternal debtand exchange rate of ASEAN states.

H11:There isimportant positive relationshipbetween theauthorities budget balanceand exchange rate of ASEAN states.

H12: There isimportant positive relationshipbetween theuniverse petroleum oil monetary valueand exchange rate of ASEAN states.

3.4Research Design

Theintent of this research surveyis to make the hypothesis proving on the relationship between macroeconomic factors ( independent variables ) and exchange rate motions ( dependent variable ) . Thetype of this research probewill be a correlational survey as it aims to place the macroeconomic basicss that will impact the exchange rate alterations in ASEAN economic systems. For this correlational survey, the extent ofresearcher’s interventionwill be minimum as it involves merely the secondary information which will be collected from the official International and countries’ web site such as Cardinal Banks web sites, International Monetary Fund Databank, and World Databank. Thus, thesurvey puting forthis research is in a non-contrived scene which will non impact the natural flow of the environment. Theunit of analysisfor this survey will be state where the one-year pooled series macroeconomics informations such as exchange rates, monetary value degrees, money market rates, money supply, trade balance and etc. from five selected ASEAN state will be collected from twelvemonth 1981 to 2011.

3.5Population and Sampling Design

Theresearch populationwill be on ASEAN emerging economic systems where the ASEAN members list includes 10 states: Malaya, Singapore, Indonesia, Thailand, Myanmar, Cambodia, Laos, Vietnam, Philippines and Brunei Darussalam as at April 30, 1999 ( South East Asia Economic Insight Report, 2012 ) . However, merely the sample of five ASEAN states will be selected, viz. Indonesia, Malaysia, Philippines, Singapore and Thailand where their one-year clip series informations from 1981 to 2011 are collected and pooled ( different group of states with different informations span ) for assorted arrested development trials in the survey. Meanwhile, the individual trading partner’s currency in NER survey will be United States Dollar and for NEER survey, pooled of several major countries’ currencies will be used. And since the survey includes several cross-countries pooled series panel informations trials,the entire sample sizefor NER trials will be 155 ( 31 old ages clip 5 states ) , 124 ( 31 old ages times 4 states ) , 55 ( 11 old ages times 5 states ) and 44 ( 11 old ages times 4 states ) while for NEER trials will be 93 ( 31 old ages times 3 states ) , 62 ( 31 old ages times 2 states ) , 54 ( 18 old ages times 3 states ) and 36 ( 18 old ages times 2 states ) . The grounds of taking these five states are because they are good stand foring the emerging economic systems and their country’s informations can be easy accessed through the official publication website whereas the informations available for the other five ASEAN states are rather restricted. Therefore, a non chance – convenience trying design is applied in this survey as merely those ASEAN states with full one-year clip series informations set available will be selected for this research. This type of trying method is convenience to researcher and enables a speedy velocity of informations aggregation every bit good as has the advantage of low cost as all the information required are free to be accessed.

3.6Research Instrument

This survey is a quantitative attack that involves merely the secondary beginnings of informations whereby all the needed one-year clip series informations from twelvemonth 1981 to 2011 are readily to be acquired from the relevant functionary publication websites. The International Financial Statistic ( IFS ) from International Monetary Fund ( IMF ) , World Development Indicators ( WDI ) from World Bank, The World Fact Book from Central Intelligence Agency ( CIA ) , World Economic Outlook ( WEO ) and the several country’s cardinal bank are the few major beginnings for the macroeconomics variables. The macroeconomics informations includes the dependent variable:Official Exchange Ratess( domestic currency per unit of US $ ) for NER determinants’ arrested development trials andNominal Effective Exchange Ratefor NEER determinants’ arrested development trials ; the independent variables:Ratio of Consumer Price Index, CPI( as rising prices derived function ) andRatio of Money Market Ratess( as involvement rate derived function ) ,Broader Money, M2( as money enlargement ) ,Gross Domestic Product ( GDP ) per Capita( as productiveness ) ,Net Foreign Assetss( as net foreign assets ) ,Entire Amount of Export per Total Amount of Import( as trade balances ) ,Footings of Trade Index( as footings of trade ) ,Entire Trade per GDP( as trade openness ) ,Entire Reserves ( exclude or include gold ) (as entire modesty ) ,Entire External Debt Stocks or External Debt( as external debt ) ,Entire Government Revenue per Entire Government Expenses( as authorities budget balance ) andCommodity Prices of Crude Oil ( crude oil, LCU per Barrel )( as universe petroleum oil monetary value ) .

All the informations collected from each state will so be combined and formed a pooled series panel informations aggregation. Note that in econometrics and statistics, both clip series and cross-sectional informations involve merely one dimensional information ( clip series: informations aggregation from one member or person over a period of clip ; cross-sectional: informations aggregation from infinite figure of sample units at same defined point in clip ) , while the term ‘pooled series panel data’ used in the survey refers to multi-dimensional informations that relates to measurement of same cross-sectional unit over a period of clip. Table 3.1 presented the sum-up of placeholders used in stand foring each information variables, the abbreviation of variables which will be used in equation, computation expressions, the beginnings of informations and the expected mark of relationship between the variables.

Table 3.1: Summary of informations variables, placeholder used, informations beginnings and the expected mark of relationships ( go on in following page )

Types of Variable

Variable

Abbre-

viation

Proxy / Calculation

Beginnings of Datas

Expected Sign

NER

NEER

Dependant

Nominal Exchange Rate

NER

Official Exchange Ratedomestic/ Official Exchange RateU.S.= LCU/US $

World Development Indicators ( WDI ) – World Bank

N/A

N/A

Dependant

Nominal Effective

Exchange Rate

NEER

Nominal Effective Exchange Rate

International Financial Statistic ( IFS ) – International Monetary Fund ( IMF )

N/A

N/A

Mugwump

Inflation Differential

Diff_P

Consumer price indexdomestic/ CPIforeign

with CPI ( 2005=100 )

World Development Indicators ( WDI ) – World Bank

+

Mugwump

Interest Rate Differential

Diff_I

Money Market Ratedomestic/ Money Market Rateforeign

Central Bank of each state

+/-

+/-

Mugwump

Money Expansion

My

Broader Money M2,

changeless 2005 LCU

World Development Indicators ( WDI ) – World Bank

+

Mugwump

Productiveness

Goad

GDP per Capita,

changeless 2005 LCU

World Development Indicators ( WDI ) – World Bank

+

Mugwump

Footings of Trade

Tot

Footings of Trade Index,

( 2000 = 100 )

World Development Indicators ( WDI ) – World Bank

+

Mugwump

Net Foreign Asset

NFA

Net Foreign Asset,

changeless 2005 LCU

World Development Indicators ( WDI ) – World Bank

+/-

+/-

Mugwump

Trade Balance

Terbium

Entire Export / Total Import

where Export and Import in changeless 2005 LCU

International Financial Statistic ( IFS ) – International Monetary Fund ( IMF )

+

Mugwump

Trade Openness

TO

Entire Trade ( % of GDP )

where Entire Trade = Total Export + Total Import

World Development Indicators ( WDI ) – World Bank

+/-

+/-

Mugwump

Entire Reserve

TR_G

or

TR_XG

Entire Reserve include Gold,changeless 2005 LCU

or Entire Reserve exclude Gold,changeless 2005 LCU

World Development Indicators ( WDI ) – World Bank

+

Mugwump

External Debt

ED1

or

ED2

External Debt Stocks,

changeless 2005 LCU

or External Debt,

changeless 2005 LCU

World Development Indicators ( WDI ) – World Bank

& A ;

CIA World Fact Book

+

Mugwump

Government Budget Balance

GBB

Government Budget Balance,changeless 2005 LCU

World Economic Outlook ( WEO )

+

Mugwump

World Crude Oil Price

WCOP

Commodity Prices of Crude Oil ( Petroleum ) ,

National currency per Barrel

World Development Indicators ( WDI ) – World Bank

+/-

+/-

3.7Datas Analysis

The subdivision involves assorted proving and analysis on the informations collected such as cogency trial, descriptive analysis and pooled arrested development analysis. All these informations analysis will be used to gauge the consequence and separate if the proposed model can run into the aim of the survey. Since this survey does non include nominal informations such as gender, age or instruction degree, therefore, frequence analysis will non be carried out. Reliability trial will be ignored excessively as merely secondary informations from official published web site are used in the survey. All the workings for prediction and statistics will be performed by utilizing Gretl 1.9.12 package bundle.

3.7.1Validity Test

Validity trial will foremost be conducted before start roll uping the information required in full period. Validity trial is mentioning to ‘measuring what you think you are measuring’ . There are three types of cogency trial available: Contented cogency, standard cogency and factorial cogency. However, merely the first type of cogency trial will be conducted for this survey, which is the content cogency trial. It is besides known as face cogency trial that will be carried out on all the variables. This is to bespeak whether the placeholder adopted for each variable can correctly step and good stand for the variable that will subsequently be included in the exchange rates theoretical account of this survey by seeking advice from experts or supervisors of this subject of research. After corroborating the placeholder of each variable and obtaining all the required information from the relevant web sites, the informations will be cardinal into an excel file in a pooled series panel informations format as mentioned earlier in subdivision 3.5. Then, the excel sheet will be import into the Gretl for descriptive analysis and multiple arrested development analysis.

3.7.2Descriptive Statisticss

Descriptive statistics is a quantitative analysis purposes to depict the chief characteristics and sum up a aggregation of informations or information which will enable the research workers to hold better apprehension on the tendencies of the variables. The typical measurings in descriptive analysis include the computation of cardinal inclination ( e.g. mean, average and manner ) and computation of variableness or scattering ( e.g. standard divergence, discrepancy, upper limit and lower limit of variables, kurtosis and lopsidedness ) . Note that the distribution form may besides be illustrated through indices such as lopsidedness and kurtosis.Skewness in chance or statistics is conducted for mensurating the chance distribution’s dissymmetry from the mean of a real-valued random variable. The skewness value can be positive, negative, or even unsure. As for kurtosis, it is used to depict the signifier of a chance distribution, whereby it measures the extremum grade in a distribution ( Dodge, 2003 ) .

3.7.3Multiple Regression Analysis ( Pooled OLS )

Multiple arrested development analysis ( MRA ) will be conducted in the survey whereby MRA is a statistical technique that uses two or more explanatory variables to gauge the result of the antiphonal variable and the fittingness of the theoretical account. So, the end of MRA in this survey is to pattern the relationship between the 12 macroeconomic independent variables and the dependant variable by utilizing the Ordinary Least Square ( OLS ) tool in the Gretl package on the pooled series panel informations. By and large, the multiple R-square technique in MRA estimates the additive equation based on the undermentioned signifier:

Yt = ??›???‘?+ ??›?1??‘‹1t+ ??›?2??‘‹2t+ ??›?3??‘‹3t+ a‹? + ??›?N??‘‹National Trust+ ???ˆT— eqn. ( 1 )

where T is the TThursdayobservation on the NThursdayindependent variable, ??›???‘?is the arrested development intercept and ???ˆ is the mistake.

For this survey, all the observations are collected from 5 ASEAN states and pooled up for OLS arrested development analysis. Therefore, the theoretical account is known as pooled series panel arrested development theoretical account and it is implicitly presuming that all persons have same coefficients including the intercepts. The equation will be as below:

Yttriumit= ??›???‘?+ ??›?1??‘‹1it+ ??›?2i??‘‹2it+ ??›?3??‘‹3it+ a‹? + ??›?N??‘‹n it+ ???ˆit— eqn. ( 2 )

where I is the single dimension, T is the clip dimension and the remainders are same in eqn. ( 1 ) . The ground of taking pooled arrested development theoretical account alternatively of unpooled ( individual state ) arrested development theoretical account is because of the anticipation of exchange rate on panel informations type ( and leting for i¬?xed ei¬ˆects ) was discovered to hold much better public presentation and rule the appraisals generated by time-series arrested development theoretical accounts every bit good as random walk anticipations ( Cerra and Saxena, 2010 ; Groen, 2005 and Mark and Sul, 2001 ) . The consequences from pooled MRA will bespeak whether to accept or reject the hypotheses proposed every bit good as uncovering on how each variable or all independent variables together will lend to the dependant variable. The value of R2in the trial will bespeak which group of independent variables can assist to foretell the dependant variable better and higher % of adjusted Roentgen2value indicates if the extra variable is important to the dependant variable.

Therefore, to happen the relationships of NER and NEER with the macroeconomic basicss, the general equations for the pooled series panel arrested development theoretical accounts of NER and NEER for short-run and long-run are formed as shown in eqn. ( 3 ) to eqn. ( 6 ) :

For Short-Term NER: –

— eqn. ( 3 )

For Long-Term NER: –

— eqn. ( 4 )

For Short-Term NEER: –

— eqn. ( 5 )

For Long-Term NEER: –

— eqn. ( 6 )

In the above equations, the inferior I represents a state ( Indonesia, Malaysia, Philippines, Singapore or Thailand ) in the sample, while T denotes the figure of clip periods ( annually ) . Following,denotes the invariable or besides known as intercept of the equation,represents the coefficient of each variable andbases for error term. Other symbols definitions ( each variable ) have been presented in Table 1 in subdivision 3.5. For the equation of the research theoretical account, logarithm ( Ln or cubic decimeter ) mathematical operation will be applied for all variables in long-term MRA trial except net foreign plus ( NFA ) as there are some negative values in certain old ages of informations which may impact the arrested development analysis of the survey. On the other manus, log difference ( LnDiff or ld ) will be applied for all variables in short-term MRA trial so that it can compare and analyse the informations twelvemonth by twelvemonth. By taking log or log differences on the equation, it can assist to better the theoretical account tantrum by disregarding those skewed informations. The difference of reading between taking and without taking log operation is shown as below: –

LnY = ±?LnX: A1 % increase/decrease in X would take to a?% increase/decrease in Y

Y = ±?Ten: A one unit addition in X would take to a? unitincrease/decrease in Y

1

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