One of the three broad objectives of the Federal Government of Nigeria’s Economic Recovery & Growth Plan (ERGP) is to build a globally competitive economy, with a key execution priority of stabilizing the macroeconomic environment. Macroeconomic policy instruments such as the interest rate and exchange rate remain prime monetary drivers of growth and competitiveness in any economy. This empirical study therefore proffers response to the question of which of interest rate and exchange rate makes more significant contribution to economic competitiveness in Nigeria. We have employed an Ordinary Least Square Regression technique to measure the impact of interest rate and exchange rate on GDP using data spanning from 1981-2016. Results reveal that exchange rate has more significant impact on economic competitiveness than interest rate. The Federal Government of Nigeria is therefore advised to implement policies to improve the exchange rate system in Nigeria.
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During the early 1990s much has been written about the return of foreign private capital to many of the larger Asian and Latin American countries. However, until 1992 there was little evidence that countries in sub-Saharan Africa were participating in this phenomenon. In this paper we use variance decompositions and impulse responses from vector autoregressions to shed light on the possible causes and consequences of capital inflows to four countries: Ghana, Kenya, Uganda, and Zimbabwe. We use trend-cycle decompositions to provide evidence linking the appreciation of the real exchange rate to periods of heavy capital inflows. We show that domestic real interest rates have played an important role in explaining the recent behavior of the real exchange rate. In particular, we trace the rise in domestic nominal and real interest rates to policies designed to liberalize the domestic financial sector and attempts to curb the monetary expansion associated with the capital inflows through sterilized intervention.
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. Secondly, we argue that the capital market approach used by past empirical studies, such as Choi et al. (1992), Wetmore and Brick (1994) and Choi and Elyasiani (1997), only measures the bank’s foreign exchange and interest rate risks over and above that of the market portfolio. To estimate the bank’s total exposure to the foreign exchange rate and interest rate mo vements, we use orthogonalised, rather than actual, market returns to measure the time varying exposure of Chinese banks 3 . Thirdly, existing studies on banks’ exposure have examined almost exclusively the linear relationship between foreign exchange rate changes and bank returns 4 . This study relaxes the linearity assumption and investigates exposure component that may be caused by the nonlinear relationships between exchange rate movements and firm’s cash flows. Fourthly, we are the first to control for combined effects of the time-varying adjustments, nonlinear exposure and the market return orthogonalisation on the foreign exchange and interest rate exposure of individual banks. Finally, the time varying exposure coefficients allow us to use panel regressi ons to examine the determinants of banks’ exposure to interest rate and foreign exchange fluctuations. In addition to their ability to overcome the small-sample size problem, panel regressions deal with the potential biases associated with
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Hashemzadeh and Taylor (1988) have found bi-directional causality present in regression models between money supply and stock returns using stock indexes to estimate market returns. As regards, the interest rate the results are not as conclusive. The direction of causality seems to be mostly running from interest’s rate to stock price but not the other way. Solnik (1987) found a weak positive relation between real stock return de f erential and the changes in the real exchange rate and he also found that a real growth in the stock market also has a positive influence on the exchange rate.
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After confirming stationarity between the variables using the Augmented Dickey Fuller unit root, the cointegration test of Johansen (1988, 1991) and Phillips and Ouliaris (1990) is also applied to avoid spurious analysis. Thereafter the long-run association amid exchange rate, inflation and interest rate is determined by the use of a single vector cointegration procedure. Although various methods can be utilized are applicable for testing coiintegration. The “Fully Modified OLS” of Phillips and Hansen (1990) is utilized in this paper. This method has the merit of attaining asymptotic effectiveness by putting into consideration the existence of autocorrelation and to impede the endogeneity issues between regressors. The Dynamic OLS and Canonical Cointegration Regression of stock and Watson (1993) are used for robustness to confirm the consistency of the FMOLS result. The DOLS approach further has a merit of preventing probable effects of endogeneity in the regressors that might occur. If cointegration is confirmed amid the variables, the individual cointegration regressions can be applied to the individual order of series. Therefore to estimate the long-run regression the FMOLS, DOLS and CCR are employed. Model expression:
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Though these four factors are independent in nature because of the globalization all these are dependent one another. The above picture clearly explains that when there is a shock in FDI the response of Real interest rate goes negative in the beginning later moves closer to zero .same way GDP continues negative for four years later start to move in an uptrend. The exchange rate in the positive trend.
Innovations in real interest rates have a slightly weaker impact on changes in expectations about future dividends. France has 39% significant sectors, the UK 37.5%, Italy 32% and Germany 25% There is an even spread be- tween negative and positive revisions to expectations across the industry sectors in each country. The majority of the betas capturing news about future excess returns are significant. With respect to innovations in changes in exchange rates, the betas are mostly negative for German and Italian in- dustry portfolios, while for France and the UK there is a relatively even split between negative and positive betas on the sectors. Typically the absolute values of the exchange rate dividend betas are greater than those of the ex- cess return betas. However, for unexpected changes in real interest rates the excess return betas are larger in Germany, Italy and the UK than the cash flow betas. The results for the French sectors show that the magnitude of revisions to expectations about future dividends is greater than the changes to expectations about future excess returns.
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The study empirically investigates the impact of interest rate and exchange rate on capital market performance in Nigeria. Secondary data were obtained from central bank of Nigeria statistical bulletin and Security exchange commission (SEC) covering the period of 1978 to 2012. Multiple regressions and Unit roots were employed to analyze data on variables such as interest rate, exchange rate, and market capitalization with the adjusted R 2 which significant at 0.9256 (92.6%), it signifies that interest rate and exchange rate accounted for 92.6% of the variation in the influence of the market capitalization in Nigerian capital market. It is therefore concluded that exchange rate has positive impact on capital market but there is a negative relationship between interest rate and capital market performance. The result suggests that Government should ensure appropriate determination of interest rate level that will break the double-edge effect of interest rate on savers and local investors in order to encourage investment and transactions in Nigerian Capital Market. Only the interest rate policy that can attract savings mobilization and encourage domestic investment will help the economy.
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In view of the importance of a well-managed exchange rate and interest rate for economic growth, this study employs econometric methodologies such as co- integration and Error Correction framework to examine the relative effects of exchange rate and interest rate on Nigeria’s economic growth. The study uses the Error Correction Model (ECM) framework after co-integration has been established among the variables. The ECM is employed to estimate the relative effects of exchange rate and interest rate on economic growth. The use of this approach predicts the cumulative effect taken into account the dynamic effect among exchange rate, interest rate and other examined variable. Once the variables are co-integrated, it becomes easy to distinguish between the long-run and short-run relationship. Therefore, to capture both the long-run and short-run dynamics of exchange rate and interest rate on economic growth in Nigeria, an ECM employing the Johansen co-integration techniques was employed which allows for the estimation of short-run dynamics as well as long-run equilibrium adjustment processes.
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ABSTRACT: This paper examines the multi-scale relationship between the interest rate, exchange rate and stock price using a wavelet transform. In particular, we apply the maximum overlap discrete wavelet transform (MODWT) to the interest rate, exchange rate and stock price in US over the period from january 1990 to december 2008 and using the definitions of wavelet variance, wavelet correlation and cross-correlations to analyze the association as well as the lead/lag relationship between these series at the different time scales. Our results show that the relationship between interest rate and exchange rate is not significantly different from zero at all scales. On the other hand, the relationship between interest rate returns and stock index returns is significantly different from zero only at the highest scales. The exchange rate returns and stock index returns have a bidirectional relationship in this period at longer horizons.
Since the post-crisis in 1997-1998, that has an enormous effect on the high inflation rate, which affects the interest rate volatility of Asian economies, particularly Indonesia. Therefore, the determination of interest rates is not only influenced by inflation but also the sharing of factors that can cause a bank to determine the size of the interest rate, whether it is deposits, savings, or credit. The purpose of this study is to analyze the effect of macroeconomic variables on the interest rate volatility in Indonesia. We used ordinary least square to estimates the quarterly data from 2002: I to 2017: I. The estimation result finds that the dynamic in the money supply, inflation rate, and the exchange rate of the IDR vis-à-vis USD has a positive and significant effect on the interest rate volatility. However, the business cycle has an inverse effect on the interest rate volatility in Indonesia.
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causal relationships between stock prices and exchange rates by using data from 2001:02-2008:01. The results reveal the existence of a bidirectional causal relationship between the exchange rate and stock prices. Büyükşalvarcı  investigates the effects of some macroeconomic variables (such as consumer price index, oil price, exchange rate and money supply) on the ISE 100 index using multiple regression analysis for the period 2003:01-2010:03 in Turkey. Yıldız and Ulusoy  examine the effect of exchange rate volatility on the Turkish stock market using monthly data for the period 1987-2010. They find no significant relationship between volatility of exchange rate and Turkish stock returns. Zia and Rahman  attempt to analyze the dynamic relationship between stock market index and exchange rate data over the period January 1995 to January 2010 in Pakistan. Their findings show no causality between exchange rate and stock prices. Anlas  explores the relationship between exchange rates and the Istanbul stock exchange rate by employing monthly data from January 1999 and November 2011. The study indicates that changes in the value of US dollars and Canadian dollars are positively related to changes in the ISE-100. In addition, this study shows that fluctuations in domestic interest rates and the Saudi Arabian riyal have a negative impact on the index.
This research covers the influence of interest rate, exchange rate and inflation on stock returns of ASE Free float index. The three macro variables which are taken under consideration are deemed very major for the economy of any country. Therefore, any change among these variables consequence the economy in different ways. Thus, the authoritarian takes step in order to make adjusts in their rules which can involve the economy in a positive way. Ten years monthly data from 2005 to 2015 is taken in contemplation. Multiple regression models are applied on the data where result shows that firms are negatively correlated to interest rate and positively correlated to inflation with zero relationship with exchange rate and stock returns. Also, R square shows a weak relationship between independent and dependent variables.
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important determinants for an economy’s stability and development. This provides us with motivation to study the interactive relationships between these two factors. This paper focuses on one particular aspect of this relationship, namely, the implications of the managed floating exchange rate. The main objectives of this paper are as follows. First, we study whether the monitoring band regime in Singapore is related with a much higher flexibility of the interest-rate policy. The crisis leads to an increase in Singapore-U.S. interest differentials which means a breakdown of the Singapore-U.S. interest link. Second, the volatility of the interest differential in the crisis periods is expected to be higher than that in the non-crisis periods.
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Given the reality that sterilized intervention by industrial economies tends to be ineffective and that policy makers show no appetite to return to the kinds of controls on international capital flows that helped keep exchange rates stable over the Bretton Woods era, a commitment to damping G-3 exchange rate fluctuations requires a willingness on the part of G-3 authorities to use domestic monetary policy to that end--this, in turn, may require tolerating more variable interest rates. However, while trading patterns may become more stable in an environment of predictable G-3 exchange rates, debt-servicing costs do not as a result of the greater variability of international interest rates. The welfare consequences to an emerging market economy, therefore, are ambiguous, depending on initial conditions, the specification of behavior, and the dynamic nature of the tradeoff between lower G-3 exchange rate volatility and higher G-3 interest rate variability.
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However, as the recent experience of several Asian economies suggests, unless the central bank adopts a …xed exchange rate regime like China, it is not always possible to achieve a nominal depreciation. Orphanides and Wieland (2000) and Coenen and Wieland (2003), who also recommend that in the presence of the zero lower bound, the central bank should rely on the exchange-rate channel, suggest that the central bank can create a depreciation via a portfolio-balance e¤ect. In particular, this can be done by expanding the monetary base on a large scale. This paper, on the other hand, argues that in order to create a depreciation successfully, the central bank also has to rely on the expectations channel. That is, the present paper implies that aggressive monetary-base expansion proposed by Orphanides and Wieland (2000) may be e¤ective, but only if the central bank can make a credible promise to keep injecting liquidity into the economy going forward even when the de‡ationary pressure begins to subside. According to the analysis in this paper, by expanding the monetary base, but on a discretionary basis, and thereby only relying on the portfolio- balance e¤ect, the central bank may not be able to generate a depreciation.
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Starting with the mean, the Japanese yen/U.S. dollar exchange rate with a mean value of 105 reveals Japan as the economy with the weakest currency relative to the U.S. dollar, when compared to the exchange rates of the other G7 countries. The average interest rate for the period under consideration is 2% for Canada and the United Kingdom, which is the highest, and Japan is the country with the lowest interest rates. The inference from the standard deviation also is that Japan is the country with the most volatile exchange rate, while the United Kingdom has the least volatile exchange rate. However, as expected of developed economies, the standard deviation for the interest rate seems to be reasonable for both the euro and non-euro G7 countries. With respect to the distributions, we find evidence of non-zero skewness for all the series and across all the G7 countries. The kurtosis statistic is, however, mostly platykurtic in a number of countries, except in a few instances in the case of Japan, Canada, and the euro area. These differences could support our assumption of different responses of exchange rates to changes in the interest rate differential across countries.
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unaffected since the interest rate is held constant. Private consumption increases since household disposable income increases. On the money market higher income implies, higher money demand. The CBN must therefore let money supply increase if it holds the interest rate constant. Interest rate is currently constant at 18% and it remains largely to be seen the consequences of the action of the government of Nigeria particularly on agricultural sector. Agriculture is typically a sector which is most exposed to the influence of foreigntrade because almost all of its products are either exported or importable, or they are close substitutesin production or consumption with products which are importable or exportable. Cushman (1988); Chambers and Just (1991) indicated a significant depressive effect of exchange risk. However Abel (1983) showed that if one assumes perfect competition, convex and symmetric costs of adjusting capital, and risk neutrality, investment is a direct function of price (exchange rate) uncertainty. Hence, agriculturalprices are largely determined by those of international markets and by the filterthrough which the latter are transmitted to the domestic economy, which is the exchange rate. The summarized policy effects of Mundell- Fleming model is shown in Table 1:
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Emerenini and Eke  investigated the impact of monetary policy rate on inflation in Nigeria using monthly data from January 2007 to August 2014. The ordinary least square (OLS) method was adopted because of its best linear unbiased estimator (BLUE) property. The result showed that expected inflation, exchange rate and money supply influenced inflation, while annual treasury bill rate and monetary policy rate though rightly signed did not influence inflation in Nigeria within the period under investigation. The estimated model displayed that all the explanatory variables used for the analysis accounted for 90% variation in explaining the direction of inflation as regards to increase or decrease. The co-integration test showed that a long term relationship existed among the variables and they were stationary at order one I (1).
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In this paper we have studied the exchange and interest rate pass-through channels in China. First, the Granger causality test results show that the exchange rate and the Shanghai composite index return have a causal effect on both imports and exports. As to the interest rate channel, the results show that the deposit rate, lending rate, and Shanghai composite index return have causal effects on PPI. Second, the results of Johansen’s cointegration show a long-run relationship between the exchange rate and exports. On the other hand, we also find that both the deposit rate and the Shanghai composite index have a long-run equilibrium relationship with the Producer Price Index. Third, in the impulse response function, a sustained negative shock to the level of the exchange rate and the Shanghai composite index return induces a sustained decrease in the level of imports and exports. A sustained positive shock to the level of the deposit rate, lending rate, and the Shanghai composite index return induces a sustained decrease in the level of PPI. On the other hand, in the variance decomposition, we note that the exchange rate affects the variance of imports and exports. The deposit and lending rates also affect the variance of PPI.
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