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Nexus between monetary policy, net foreign assets and exchange rate: fresh insight from Lao PDR

Author

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  • Sorphasith Xaisongkham
  • Liu Xia
  • Muhammad Saeed Meo
  • Phetphongphanh Savangchakavane
  • Somchith Sompaseuth

Abstract

This research aims to discover the nexus between monetary policy, net foreign assets and exchange rate in Lao PDR by applying an autoregressive distributed lag (ARDL) model and a modified version of the Toda % Yamamoto approach to the Granger causality relationship. The findings aver the presence of cointegration when exchange rate and monetary policy were used as response variables and corroborated a feedback effect between exchange rate with currency in circulation and monetary policy. Similarly, the paper found a negative effect of net foreign assets on the exchange rate, while monetary policy was a major cause of the depreciation of domestic currency against the US dollar in Lao PDR. The results confirmed a bidirectional causality between exchange rate and currency in circulation, while there was a one-way causality running from currency in circulation to monetary policy and net foreign assets, which policy recommendations are essential tools to exploit in practical application for Laos and other small developing countries.

Suggested Citation

  • Sorphasith Xaisongkham & Liu Xia & Muhammad Saeed Meo & Phetphongphanh Savangchakavane & Somchith Sompaseuth, 2024. "Nexus between monetary policy, net foreign assets and exchange rate: fresh insight from Lao PDR," International Journal of Monetary Economics and Finance, Inderscience Enterprises Ltd, vol. 17(4), pages 257-279.
    • Handle: RePEc:ids:ijmefi:v:17:y:2024:i:4:p:257-279
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