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The Relationship between Inflation, Exchange Rate, and Currency Substitution: Evidence from Panel Vector Error Correction Model Approach

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  • Khaysy Srithilat

    (School of Finance, Dongbei University of Finance and Economics, China,)

  • Gang Sun

    (Sun Gang, School of Finance, Dongbei University of Finance and Economics, China,)

  • Thongphet Chanthanivong

    (Faculty of Economics and Business Management, National University of Laos,)

  • Maketta Thavisay

    (School of International Trade, Dongbei University of Finance and Economics, China.)

Abstract

This study investigates the relationship between inflation, real exchange rate, and currency substitution in Southeast Asian economies based on the panel Vector Error Correction Model. Regarding the panel unit root testing result indicates that variables are stationary in the first difference which appropriate to be utilized of panel VECM technique. The empirical results suggest that there exists panel cointegration and long-run relationship between inflation, real exchange rate and currency substitution. Moreover, the evidence from both Fully Modified Ordinary Least Square (FMOLS) and Dynamic Ordinary Least Square DOLS also confirmed the existence of long-run association between variables. Increasing of inflation rate and devaluation of domestic currency positively effect on currency substitution in the long-run. Furthermore, the result of short-run causal relationship based on panel Granger causality reveals the bidirectional relationship between inflation and currency substitution and unidirectional relationship between exchange rate and currency substitution in Southeast Asia.

Suggested Citation

  • Khaysy Srithilat & Gang Sun & Thongphet Chanthanivong & Maketta Thavisay, 2018. "The Relationship between Inflation, Exchange Rate, and Currency Substitution: Evidence from Panel Vector Error Correction Model Approach," International Journal of Economics and Financial Issues, Econjournals, vol. 8(2), pages 79-84.
    • Handle: RePEc:eco:journ1:2018-02-11
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    References listed on IDEAS

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    Cited by:

    1. Khaysy Srithilat & Thipphavanh Samatmanivong & Vaiyoth Lienpaserth & Phiengsanith Chanthavixay & Visanu Boundavong & Vonsy Douangty, 2022. "The Effect of Monetary Policy on Economic Growth in Lao PDR," International Journal of Economics and Financial Issues, Econjournals, vol. 12(1), pages 67-74.
    2. Ewert Kleynhans & Clive Coetzee, 2021. "Regional Business Confidence as Early Indicator of Regional Economic Growth," Managing Global Transitions, University of Primorska, Faculty of Management Koper, vol. 19(1 (Spring), pages 27-48.

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    More about this item

    Keywords

    currency substitution; inflation rate; exchange rate; monetary policy; panel VECM;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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