The Relationship between Inflation, Exchange Rate, and Currency Substitution: Evidence from Panel Vector Error Correction Model Approach

Khaysy Srithilat, Gang Sun, Thongphet Chanthanivong and Maketta Thavisay
Additional contact information
Khaysy Srithilat: School of Finance, Dongbei University of Finance and Economics, China,
Gang Sun: Sun Gang, School of Finance, Dongbei University of Finance and Economics, China,
Thongphet Chanthanivong: Faculty of Economics and Business Management, National University of Laos,
Maketta Thavisay: School of International Trade, Dongbei University of Finance and Economics, China.

International Journal of Economics and Financial Issues, 2018, vol. 8, issue 2, 79-84

Abstract: This study investigates the relationship between inflation, real exchange rate, and currency substitution in Southeast Asian economies based on the panel Vector Error Correction Model. Regarding the panel unit root testing result indicates that variables are stationary in the first difference which appropriate to be utilized of panel VECM technique. The empirical results suggest that there exists panel cointegration and long-run relationship between inflation, real exchange rate and currency substitution. Moreover, the evidence from both Fully Modified Ordinary Least Square (FMOLS) and Dynamic Ordinary Least Square DOLS also confirmed the existence of long-run association between variables. Increasing of inflation rate and devaluation of domestic currency positively effect on currency substitution in the long-run. Furthermore, the result of short-run causal relationship based on panel Granger causality reveals the bidirectional relationship between inflation and currency substitution and unidirectional relationship between exchange rate and currency substitution in Southeast Asia.

Keywords: currency substitution; inflation rate; exchange rate; monetary policy; panel VECM (search for similar items in EconPapers)
JEL-codes: E31 E52 F31 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://www.econjournals.com/index.php/ijefi/article/download/6058/pdf (application/pdf)
https://www.econjournals.com/index.php/ijefi/article/view/6058/pdf (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eco:journ1:2018-02-11

Access Statistics for this article

International Journal of Economics and Financial Issues is currently edited by Ilhan Ozturk

More articles in International Journal of Economics and Financial Issues from Econjournals
Bibliographic data for series maintained by Ilhan Ozturk ().