Impacts of monetary policy drivers in shaping exchange rates: A comparative analysis across Vietnam, Thailand, Phillipines, Malaysia, Indonesia, and SIngapore

Abstract

This empirical study investigates the relationship between exchange rates and monetary policy factors in Vietnam, Thailand, Philippines, Malaysia, Indonesia, and Singapore from 2000 to 2022. Its primary aim is to enhance the empirical understanding of how monetary policy influences exchange rates within this region. Given the paramount importance of exchange rates in global trade and finance, comprehending the interplay between monetary policy and exchange rates holds vital implications for policymakers and economic stakeholders. Methodologically, this research employs a panel data approach, utilizing data spanning 2000 to 2022. The focal monetary policy factors analyzed encompass Gross Domestic Product (GDP), Consumer Price Index (CPI), and Monetary Aggregate (M2). To account for potential endogeneity and heteroskedasticity, the study applies the Generalized Method of Moments (GMM) and Feasible Generalized Least Squares (FGLS) methods. The research outcomes indicate that a 1% increase in M2 results in a 4.786% appreciation in the exchange rate over the long term. Similarly, a 1% increase in GDP is associated with a 5.51% depreciation in the exchange rate, while the CPI differential yields a comparatively smaller 0.02% depreciation for a 1% increase. These findings underscore the prominent role of monetary policy factors, particularly M2, in shaping variations in exchange rates. Acknowledging inherent limitations, including potential omitted variables and the absence of an analysis of the 2008 global financial crisis, the study's future directions extend to encompass non-Southeast Asian economies. Further research may involve integrating dummy variables to account for critical economic events and adopting advanced modeling techniques such as Vector Error Correction Model (VECM) and Granger causality, thereby offering deeper insights into the causal relationships between monetary policy and exchange rates.