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Title: Market models for the determination of the exchange rate
Other Titles: Empirical evidence from emerging financial markets-The case of Indonesia
Authors: Islam, Sardar M.N.
Mohammad Rusydi
Keywords: Emerging financial market
Economic methodology
Exchange rate
Monetary model
Purchasing power parity
Issue Date: 2004
Publisher: Universiti Tenaga Nasional
Abstract: The issues of exchange rates determination have long been a issue of research and policy making, especially since the collapse of the Bretton Woods system. In order to test empirically the well known financial and economic exchange rate models to examine the exchange rate behavior and its determinants in Indonesia, a number of econometric methods are used. These are: unit root test, linear and non-linear volatility modeling. Univariate time series models like exponential smoothing and autoregressive integrated moving average models, as well as Augmented Dicky Fueller method are also used. In general, the Monetary model has been a preferred model since the end of the Breton Woods period. Although it seems common to assume that all equilibrium interaction are met, it is believed that the Monetary model is unlikely to hold at each point in time, thus it should be viewed as a long-run model of exchange rate determination. On the contrary, with the PPP model, there are many reasons why deviations from PPP happens such as there may be some restrictions on trade and capital movements or transfer pricing in a country that will distort the relationship between domestic and foreign prices. Although there are several disputes on the validity of PPP as a short-run correlation, there seems to be a general agreement that the PPP will hold in the long run. However, empirical tests of the well known financial and economic exchange rate models in this paper show that neither the monetary model nor the PPP model can explain the exchange rate behavior and its determinants in Indonesia.
Appears in Collections:College of Business Management & Administration

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