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Money's causal role in exchange rate: Do divisia monetary aggregates explain more?

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  • Ghosh, Taniya
  • Bhadury, Soumya

Abstract

We investigate the power of Divisia monetary aggregates in predicting exchange rate variations for India, Israel, Poland, the UK, and the US in the years leading up to and following the 2007–08 recession, during which the interest rates for some major economies have been stuck at or near the zero lower bound (ZLB). Consequently, the interest rate has become uninformative regarding the stance of monetary policies. As an important innovation, our research adopts the Divisia monetary aggregate as an alternative to the policy indicator variable. We apply the bootstrap Granger causality method, which is robust to the presence of non-stationarity in our data. We also apply bootstrap rolling window estimates to account for the parameter non-constancy and structural breaks in our sample. We find a strong causality from Divisia money to exchange rates and further highlight the importance of Divisia at ZLB by capturing the time-varying link between these variables.

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  • Ghosh, Taniya & Bhadury, Soumya, 2018. "Money's causal role in exchange rate: Do divisia monetary aggregates explain more?," International Review of Economics & Finance, Elsevier, vol. 57(C), pages 402-417.
    • Handle: RePEc:eee:reveco:v:57:y:2018:i:c:p:402-417
    DOI: 10.1016/j.iref.2018.02.005
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    2. Belongia, Michael T. & Ireland, Peter N., 2024. "The transmission of monetary policy shocks through the markets for reserves and money," Journal of Macroeconomics, Elsevier, vol. 80(C).
    3. Kostyantyn Anatolievich Malyshenko & Majid Mohammad Shafiee & Vadim Anatolievich Malyshenko & Marina Viktorovna Anashkina, 2023. "Dynamics of the securities market in the information asymmetry context: developing a methodology for emerging securities markets," Papers 2307.04140, arXiv.org.
    4. Bhadury, Soumya & Ghosh, Saurabh & Gopalakrishnan, Pawan, 2021. "In quest for policy 'silver bullets' towards triggering a v-shaped recovery," MPRA Paper 110905, University Library of Munich, Germany.

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    More about this item

    Keywords

    Monetary policy; Divisia monetary aggregates; Simple sum; Nominal exchange rate; Real effective exchange rate; Bootstrap granger causality;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • 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
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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