This paper attempts to evaluate and analyse the various factors that determine exchange rates in the long run. This paper aims to identify and evaluate the long-run determinants of exchange rates with the help of available literature.
The various determinants of exchange rates and factors causing fluctuations in currency rates have been evaluated with the help of secondary data sources…
There are several factors that are responsible in determining exchange rate in any country. Exchange rates show the value of a country's currency through which it can buy other country's currencies. Every country needs stable foreign exchange rate to trade freely. Exchange rate may get affected through various things. There are two regimes with respect to exchange rate which can either be fixed or flexible. In fixed exchange rate regimes, the currency rates do not move freely. However, in flexible exchange rate system, the currency rates are affected by a number of variables prevailing in an economy. The macroeconomic factors that affect exchange rates are variable by nature and thus play a great role in determining exchange rates. Governments and Central Banks especially utilize these macroeconomic factors to maintain a desired level of exchange rate in the economy. These macroeconomic factors may lead to great fluctuations in exchange rates both in short and long run. The factors that determine exchange rate in the long run include imports/exports, monetary shocks, inflation, demand/supply pressures, foreign reserves, economic productivity and government spending etc. The study of factors determining exchange rate in the long run is important so as to understand the reasons for which the currency rates appreciate or depreciate.
This paper shed light on the factors determining exchange rates in the long run and evaluates these exchange rate determinants. It elaborates and gives comprehensive understanding of factors that can cause the value of a currency to fluctuate.
DETERMINANTS OF EXCHANGE RATE IN LONG RUN
Exchange rates greatly signify a country's overall economic position and trading prospects. These rates depict a country's position in terms of its currency's price with respect to that of the other. These are mainly the rates at which currencies could be bought and sold. Exchanges rates have a great impact on other economic variables of a country such as money supply, trade growth, imports, exports and interest rates etc. In the same vein, there are several factors that cause fluctuations in a currency's exchange rates. These determinants of foreign exchange rates may be external or internal and tend to play a great role in causing changes to currency rates. Some of these factors either take place in the short run while several cause exchange rate fluctuations in the long run. The rest of the paper elaborates and evaluates the various determinants of currency exchange rate in the long run.
Exports and Imports
Countries having fewer imports and more exports usually have high exchange rates. In the same fashion, countries having a lower tendency to export and have imports tend to have trade deficits. Current account surplus and deficit play a significant role in determining exchange rate of a particular country. The elements form crucial elements of a country's GDP. Balance of payment in the receipt side shows the trade surplus and thus puts the positive impacts on exchange rate while the balance of payment in the payment side reflects the trade deficit or loss which puts the negative impact on exchange ...
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(Long-Run Determinants of Exchange Rates Essay Example | Topics and Well Written Essays - 3000 Words)
“Long-Run Determinants of Exchange Rates Essay Example | Topics and Well Written Essays - 3000 Words”, n.d. https://studentshare.net/politics/303967-long-run-determinants-of-exchange-rates.
From the period of 2004 to March 3, 2012, Yuan appreciated by more than 23% and fluctuated between 8.2800 to 6.3039. The following graph shows us that condition of Yuan between 2004 and 2012. Figure 1: China’s exchange rate appreciation and Dollar’s Depreciation Source: Google Finance, 2012 The fluctuation can be divided into the following important periods: Figure 2: Important USD/CNY Fluctuation Date Source: Google Finance, 2012 China follows the policy of managed exchange rates.
Though foreign currency could be accessed in other forms such as exports and maybe in the tourism sector, the foreign exchange market has withstood the test of time as being the best and easiest way to acquire foreign currency. However, this market has been observed to be among the most volatile markets in the world.
The trends for the foreign exchange indicate that XJP lost 60 million Renminbi in 2003 and other 70 million in 2004 (Moffett, Stonehill & Eiteman, 2008, p. 253). Foreign exchange gains and losses have a significant impact for XJP’s corporate performance, since it fully depends on how the foreign currencies behave towards each other to make its profits or suffer losses.
Based on Haynes and Stone (1981), this assumption could lead to uncertainties and problems.
Univariate Time Series Models - Long AR (Auto regression), Schwartz (1978) order selection criterion, Akaike (1974) procedure, Wiener-Kolmogorov prediction formula in the frequency domain, Random Walk model.(1.
On the other hand high interest rates are positively related to short-term exchange rates due to increased demand of the national currency. This results in higher prices of exported products and services, followed by decrease in exports, and increase in imports.
Changes in interest and exchange rates directly affect profitability of companies having international business by influencing their investment decisions, production costs and prices. High interest rates are associated with higher business risk and make cost of capital more expensive, thus reducing profitability and amount of business investments in the region over a long-run period.
ver, in a fixed rate administration, one of the two nations, with the agreement of the other, situates the exchange rate and allows its money distribution to adjust to suit to the level needed (Barro, 2008). Furthermore, in flexible exchange rate administration, the government
All else remains unchanged; the higher demand would lead to appreciation of the currency, while the reduced demand would lead to deprecation of the currency. All else remains equal higher supply of currency would lead to depreciation of the currency, while