2.1 Theoretical Framework
Consumer Price Inflation (CPI)
Consumer price index or inflation CPI is to review the changes of cost of a goods and services yearly based on the demand on average consumer (Venkadasalam, 2015). In other words, CPI weights the goods and services of the changes in the price that households utilize. (Consumer price index manual, 2004) Price index will display the movement in average when the price of goods and services does not change at all in the same rate
Interest Rate
Interest rate is one of the factors that cause the exchange rate to appreciate or depreciate. Financial theory says that the value of firm is determined by the changes in exchange rate and interest rate (Hyde, 2007). Risk of exchange rate and interest
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The results illustrate that, the inflation and exchange rate has a positive relationship and it is significant related in Philippine. In this research, researcher said that exchange rate depreciate when the inflation in government debt raise.
(Holden, Holden , & Suss, 1979) said that inflation has less impact on exchange rate. Countries have their own monetary policy, differences trading relations and productivity movements. Therefore, countries adjust their exchange rate to fulfill the needs of their trade partner by controlling the inflation rate. The beta coefficient results in this research shows inflation rates implies in exchange rate have a strong relationship where the beta coefficient is 0.3676. There are positive relationships between inflation and exchange rate as the coefficient sign is positive.
The relationship between exchange rate and inflation rate can be positive or negative relationship. In the prior research of (Heller, 1978), it stated that when the coefficient of inflation is positive value it means that country using floating exchange rate. In contrast, when the coefficient is negative value it illustrate the currency has a peg exchange rate.
Interest
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Vector autoregressive (VAR) model, Johansen-Juselius cointegration and Granger causality tests were used in this research. Interest rate, money supply, consumer price, trade balance and composite indices were examine the exchange rate volatility in Malaysia, Singapore, Indonesia and Thailand (Lee-Lee & Hui-Boon, 2007). The results indicates that in short run, all the macroeconomics were significant affected by fluctuation of exchange rate in Malaysia, Singapore, Indonesia and
So when the dollar is depreciating, the exchange rate becomes smaller. Exchange rate (foreign exchange rate, forex rate or FX rate) is the number of units of a given currency that can be purchased for one unit of another currency. The United States capital markets are becoming more attractive to foreign investors. Since the dollar is falling, it makes foreigner’s investment in the United States more affordable. Therefore, foreigners take this opportunity to invest in the United States.
Economic indicators often affect and influence the value of a country's currency. The Trade Deficit, the Gross National Product (GNP), Industrial Production, the Unemployment Rate, and Business Inventories are examples of economic indicators. We will be dealing with four specific indicators: interest rate, inflation, unemployment, and employment growth, as well as Real Gross Domestic Product (GDP). Real GDP is so called because the effects of inflation and depreciation are accounted for in the figures. The state of the economy is important both on a micro and macroeconomic level.
In the long run, those countries with higher than average inflation see their exchange rate fall. When inflation is high, a country becomes less competitive in international markets causing a fall in exports (a demand for a currency) and a rise in imports (a supply of currency overseas). A fall in the exchange rate may be needed to restore a country's competitiveness in overseas markets. THE BALANCE OF PAYMENTS When we operate at a current account surplus i.e. when our exports>Imports, then foreigners will need pounds in order to finance the exports we sell them.
There is a close relationship between Gross Domestic Product (GDP) and the unemployment rate as it relates to the decrease or increase in inflation rate. The inflation rate will increase when GDP and unemployment decrease, because it will affect the purchasing power of the people of a particular country. From 1997 to 1998, both countries : Thailand and Indonesia reached their highest peak of inflation, which is 9.24% and 75.27% respectively. It is caused by the Asian financial crisis which hit most of the Asian countries. The crisis started in Thailand as its currency, Baht, is attacked by the currency traders, and eventually devalued after they found out that the market is unstaintable.
The basic definition of an interest rate is simply the cost of borrowing money. It is the cost associated with acquiring credit, whether buying a car, getting a mortgage, or taking a vacation. Interest rate is the price paid for the use of money. It is the opportunity cost of borrowing money from a lender. It can also be seen as the return being paid to the provider of financial resources. It is an important economic price. This is because whether seen from the point of view of cost of capital or from the perspective of opportunity cost of funds, interest rate has fundamental implications for the economy either impacting on the cost of capital or influencing the availability of credit, by increasing savings (Acha&Acha
Over the years, the Philippines has gone from being one of the richest countries in Asia to being one of the poorest. It has experienced growth and development since World War II. The current administration under President Gloria Macapagal-Arroyo is aiming for a more rapid growth in the coming years. In 2004, the Philippine economy grew by 6.1% surprising everyone. In 2005, the Philippine peso appreciated by 6%, the fastest in the Asian region for that year. At present, the administration is meeting its expected target growth and is continually looking positive for the future.
the empirical relations based on the VAR test conducted for the period 1990 to 2009 show that, Money supply and inflation are weakly positively correlated, Money supply and interest rates are very weakly and negatively correlated, Money supply and real GDP are strongly positively correlated, Money supply and nominal GDP are very strongly negatively correlated. Furthermore, the response of inflation to shocks in money supply is very weakly positive or has no effect since it is constant through out. This indicates that the relationship between money supply and inflation is not too significant.
The stability of currency values plays a significant role for economic and financial stability. It is not difficult to see the exchange rate fluctuations are widely regarded as damaging. As the movements of the exchange rate have significant and large effects on the trade balance, resource allocation, domestic prices, interest rate, national income and other key economic variables. Then can exchange rate movements be predicted by these fundamental economic variables?
In an economy, aggregate demand (AD) accounts for the total expenditure on goods and services. It has five constituents; Consumer expenditure (C), Investment expenditure (I), Government expenditure (G), Export expenditure (X) and import expenditure (M), This gives us: AD= C+I+G+X-M. Aggregate supply (AS) on the other hand is the total supply of goods and services in the economy. Increasing AD and decreasing AS both cause demand-pull and cost-push inflation respectively. Demand pull inflation occurs when aggregate demand (AD) continuously rises, detailed in Figure 1. The AD curve continuously shifts to the right, as demand continuously increases, from point a to b to c. This consequently causes an increase in the price level of goods and services. As prices rise, costs of production also increase, causing producers to reduce output (a decrease in aggregate supply (AS)), shifting the AS curve to the left and leading to yet another increase in prices, (t...
Inflation is the rate at which the purchasing power of currency is falling, consequently, the general level of prices for goods and services is rising. Central banks endeavor to point of confinement inflation, and maintain a strategic distance from collapse i.e. deflation, with a specific end goal to keep the economy running smoothly.
The increase in prices is known as inflation. This macroeconomic objective aims at keeping prices as low as possible. Economists normally would like to understand the changes of what is happening in the purchasing power of consumers. The price stability can be measured by looking into the (CPI) which is the index of the prices of representative basket of consumer goods and services. According to StatsSA, (2016) the inflation rate averaged 9.27 percent from 1968 to 2016. Consequently, the report states that the consumer prices index in South Africa increased by 6 percent year-on-year in July of 2016.The economists however, argue that the inflation figure obtained was one of the lowest ever experienced by south Africa due to the fact the cost of electricity and fuel remained constant. This shows that South Africa at the moment is currently doing well; however only because inflation is very dynamic and changes so it can not be guaranteed that it will remain the same
The “Four Way Equivalence Model” is a relationship between interest rates and inflation rates keeping in view the foreign exchange rates and also the changes that are expected to take place in spot rates. It gives the idea that how these things are interconnected and how increase in one factor would affect the other one and vice versa.
Inflation is one of the most important economic issues in the world. It can be defined as the price of goods and services rising over monthly or yearly. Inflation leads to a decline in the value of money, it means that we cannot buy something at a price that same as before. This situation will increase our cost of living.
The rate of inflation in a country can have a major impact on the value of its currency and the rates of foreign exchange it has with the currencies of other nations. However, inflation is just one factor among many that combine to influence a country's exchange
Related to the topic research which is relationship between inflation rate and unemployment rate, the developed country also involved in these two factors economics relationships. As we know United State is one of the most developed countries in the world because it has a highest and modern technological infrastructure and plays important role in world economics. United State is one of the Veto Power countries. For United State country, they are several research were conduct for the relationship between inflation rate and unemployment rate, Mankiw (2000), Sackl’ en (2006), and Berentsen (2011). All of these previous researches employed various approaches to achieve the same objective. Hogan (1998) said that exist a negative relationship between this two variable in a short run. The low of unemployment rate in United State has increased the inflation rate. Using the estimation of Phillips Curves model that has apply in the research, his conclude that the non-accelerat...