Linear and Nonlinear Relationship Between Real Exchange Rate, Real Interest Rate and Consumer Price Index: An Empirical Application for Countries with Different Levels of Development
DOI:
https://doi.org/10.47743/saeb-2023-0008Keywords:
linear and nonlinear Granger causality test, development levels of countries, time series analysis.Abstract
The research population of this study consists of Australia, Azerbaijan, Egypt, Brazil, Chile, Canada, Hungary, Pakistan, India, Ukraine and the United Kingdom. For these countries; T, the relationship between Exchange Rate Index (exc), Real Interest Rate (int) and Consumer Price Index (cpi) variables were examined. Data from 2000Q1 to 2021Q3 were used in the study. The data are taken from the IMF's data bank. Analysis was done in R-Studio. Wo Seasonality Test, Augmented Dickey-Fuller Test, Linear Granger Causality Analysis and Nonlinear Granger Causality Analysis were used to investigate the relationship between variables. The theory claims that there is causality in both directions between exchange rate, interest rate and inflation. In the study, the relationship between these variables was investigated with linear and nonlinear causality tests. It is thought that the empirical results that contradict the theory are caused by the development levels of the countries, their macroeconomic structures, the applied fiscal and monetary policy instruments, the conjuncture and the analysis methods. The study aims to investigate these claims. For this reason, the development levels, sociocultural and socioeconomic structures of the selected countries were requested to be different. In addition, two different test methods, linear and non-linear, were preferred for the causality relationship. It was observed that the selected analysis methods significantly affected the results. Linear causality analysis results are closer to theoretical implications. However, the level of development of the countries does not have a significant effect on the relationship between the variables.
References
Agenor, P. R., McDermott, C. J., & Üçer, M. (1997). Fiscal imbalances, capital inflows, and the real exchange rate: the case of Turkey. European Economic Review, 41(3-5), 819-825.
Baek, E., & Brock, W. (1992). A general test for nonlinear Granger causality: Bivariate model. Iowa State University and University of Wisconsin at Madison Working Paper, (137-156). Retrieved from https://www.ssc.wisc.edu/~wbrock/Baek%20Brock%20Granger.pdf
Bell, D., Kay, J., & Malley, J. (1996). A Non-parametric Approach to Non-linear Causality Testing. Economics Letters, 51(1), 7-18. http://dx.doi.org/10.1016/0165-1765(95)00791-1
Bhatti, R. H. (2014). The Existence of Uncovered Interest Parity in the CIS Countries. Economic Modelling, 40, 227-241. http://dx.doi.org/10.1016/j.econmod.2014.04.002
Bilson, J. F. (1978). The Monetary Approach to the Exchange Rate: Some Empirical Evidence (La Théorie Monétaire du Taux de Change: Preuves Empiriques) (El Enfoque Monetario Del Tipo de Cambio: Algunas Pruebas Empíricas). Staff Papers - International Monetary Fund. International Monetary Fund, 25(1), 48-75. http://dx.doi.org/10.2307/3866655
Brock, W. (1991). Causality, Chaos, Explanation and Prediction in Economics and Finance. In J. Casti & A. Karlqvist (Eds.), Beyond Belief: Randomness, Prediction, and Explanation in Science: CRC Press.
Cevher, E. (2016). Döviz Kuru Belirleyicilerinin Koşullu ve Kısmi Granger Nedensellik Testleri ile Araştırılması. In F. Yurdakul (Ed.), Döviz Kurunun Belirleyicileri, Kısmi ve Koşullu Granger Nedensellik, SETAR, LSTAR, TVAR Modelleri (pp. 105-160): Gazi Kitap Evi.
Coleman, A. (2010). Uncovering Uncovered Interest Parity During the Classical Gold Standard Era, 1888-1905. The North American Journal of Economics and Finance, 23(1), 20-37. http://dx.doi.org/10.1016/j.najef.2011.10.001
Diks, C., & Panchenko, V. (2005). A Note on the Hiemstra-Jones Test for Granger Noncausality. Studies in Nonlinear Dynamics and Econometrics, 9, 4.
Diks, C., & Panchenko, V. (2006). A New Statistic and Practical Guidelines for Nonparametric Granger Causality Testing. Journal of Economic Dynamics & Control, 30, 1647-1669. http://dx.doi.org/10.1016/j.jedc.2005.08.008
Frenkel, J. A. (1976). A Monetary Approach to Exchange Rates: Doctrinal Aspects and Empirical Evidence. The Scandinavian Journal of Economics, 78, 200-224. http://dx.doi.org/10.2307/3439924
Fuller, W. A. (1996). Introduction to Statistical Time Series (2nd ed. ed.): John Wiley and Sons.
Granger, C. W. J. (1969). Investigating Causal Relations by Econometric Models and Cross-spectral Methods. Econometrica, 37(3), 424-438. http://dx.doi.org/10.2307/1912791
Granger, C. W. J. (1980). Testing for causality: A personal viewpoint. Journal of Economic Dynamics and control, 2, 329-352. http://dx.doi.org/10.1016/0165-1889(80)90069-X
Granger, C. W. J., & Newbold, P. (1986). Forecasting Economic Time Series (2nd ed.): Elsevier.
Hamilton, J. (1994). Time series analysis: Princeton University Press. http://dx.doi.org/10.2307/j.ctv14jx6sm
Hiemstra, C., & Jones, J. D. (1994). Testing for Linear and Non-linear Granger Causality in the Stock Price-volume Relation. The Journal of Finance, 49, 1639-1664.
Kara, H., & Ogunc, F. (2005). Exchange Rate Pass-Through in Turkey : It is Slow, but is it Really Low? Research and Monetary Policy Department, Central Bank of the Republic of Turkey Working Papers, 0510.
Kayhan, S., Bayat, T., & Uğur, A. (2013). Interest Rates and Exchange Rate Relationship in BRIC-T Countries. Ege Academic Review, 13(2), 227-236. http://dx.doi.org/10.21121/eab.2013219490
Keynes, J. M. (1923). A Tract on Monetary Reform: MacMillan
Leigh, D., & Rossi, M. (2002). Exchange Rate Pass-Through in Turkey. IMF Working Paper, 2(204), 1-19.
Ollech, D., & Webel, K. (2020). A random forest-based approach to identifying the most informative seasonality tests. Deutsche Bundesbank Discussion Paper, 55. http://dx.doi.org/10.2139/ssrn.3721055
Öner, H. (2018). Döviz Kuru Ve Enflasyon Arasindaki Nedensellik Ilişkisi: Türkiye Uygulamasi. Hitit Üniversitesi Sosyal Bilimler Enstitüsü Dergisi, 11(1), 343-358. http://dx.doi.org/10.17218/hititsosbil.398547
Parveen, S., Khan, A. Q., & Ismail, M. (2012). Analysis of the Factors Affecting Exchange Rate Variability in Pakistan. Academic Research International, 2(3), 670-674. Retrieved from http://www.savap.org.pk/journals/ARInt./Vol.2(3)/2012(2.3-81).pdf
Sağlam, Y., & Yıldırım, M. (2007). 2001 Krizi Sonrası Uygulanan Faiz ve Kur Politikalarının Türkiye Ekonomisine Etkileri: Adnan Menderes Üniversitesi ve Avrupa Araştırmalar Merkezi, Güncel Ekonomik Sorunlar Kongresi’ne Sunulan Bildiri.
Sekmen, F., & Revanoğlı, G. A. (2017). Faiz Haddi ve Para Arzının Döviz Kuru Üzerine Etkisi: Kazakistan Örneği. MANAS Sosyal Araştırmalar Dergisi, 6(4), 333-342.
Su, L., & White, H. (2008). A Nonparametric Hellinger Metric Test for Conditional Independence. Econometric Theory, 24(4), 829-864. http://dx.doi.org/10.1017/S0266466608080341
Su, L., & White, H. (2014). Testing Conditional Independence Via Empirical Likelihood. Journal of Econometrics, 182(1), 27-44. http://dx.doi.org/10.1016/j.jeconom.2014.04.006
Sünbül, E. (2021). Dış Ticaret Hacmi ve Döviz Kuru İlişkisinin ARDL Sınır Testi ile Analizi (Türkiye Örneği). Journal of Banking and Financial Research, 8(1), 1-16.
Sünbül, E. (2022). Analysis of Variables Determining the Exchange Rate with a Hybrid Method Based on Conventional Time Series and Artificial Neural Networks. Ankara Haci Bayram Veli University. Retrieved from https://tez.yok.gov.tr/UlusalTezMerkezi/tezSorguSonucYeni.jsp
Sünbül, E., & Benli, Y. K. (2021). Cointegration and Causality Between Exchange Rate and Bist 100 Index: An Application with R Program. In E. Alsu & M. Karahan (Eds.), Muhasebe ve Finans Üzerine Güncel Araştırmalar. Ankara: İKSAD Pub.
Turna, Y., & Özcan, A. (2021). The Relationship Between Foreign Exchange Rate, Interest Rate and Inflation in Turkey: ARDL Approach. Journal of Ekonomi, 3(1), 19-23.
Vasilyev, D., Busygin, V., & Busygin, S. (2017). Testing and İnterpreting Uncovered Interest Parity in Russia. Russian Journal of Economics, 3(2), 158-173. http://dx.doi.org/10.1016/j.ruje.2017.06.003
Yalcinkaya, Y., & Tunalı, H. (2019). 2017-2018 Döviz Kuru Türbülansı ve Türkiye Cumhuriyet Merkez Bankası’nın Yeni Para Politikası Araçları. Ekonomi. Ekonomi Politika ve Finans Araştırmaları Dergisi, 4(1), 17-36. http://dx.doi.org/10.30784/epfad.511381
Downloads
Published
How to Cite
Issue
Section
License
Copyright (c) 2022 Ersin Sünbül

This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.
All accepted papers are published on an Open Access basis.
The Open Access License is based on the Creative Commons license.
The non-commercial use of the article will be governed by the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License as currently displayed on https://creativecommons.org/licenses/by-nc-nd/4.0
Under the Creative Commons Attribution-NonCommercial-NoDerivatives license, the author(s) and users are free to share (copy, distribute and transmit the contribution) under the following conditions:
1. they must attribute the contribution in the manner specified by the author or licensor,
2. they may not use this contribution for commercial purposes,
3. they may not alter, transform, or build upon this work.