Money Supply, Inflation and Exchange Rate Movement: The Case of Cambodia by Bayesian VAR Approach

Abstract

This research paper aims to investigate the relationship among money supply, inflation and exchange rate in Cambodia by using Bayesian Vector Autoregressive (B-VAR) approach. This study employs the monthly data in the period of October-2009 and April-2018. This research paper applies the Money-in-Utility Function (MIU) that describes the relationship between money growth and price level. Moreover, this paper also employs the Purchasing Power Parity (PPP) which shows the relationship between exchange rate and inflation. The empirical results reveal that money supply in Cambodia, depends on its previous variable. Moreover, money supply also induces the depreciation of exchange rate of Khmer Riel against US Dollar and leads to increase in inflation. Money supply induces 8% of shock to exchange rate and 0.13% to inflation based on variance decomposition while exchange rate can cause 0.024% to inflation in Cambodia. The relative low shocks from money supply to inflation and exchange rate results in supplying money with cautious manner from National Bank of Cambodia. The empirical results are found to be consistent with the theories and some empirical studied of this related fields.

The Impact of BI Rate, Exchange Rate, and Inflation on Broad Money in Indonesia

“…Therefore, it can be concluded that the exchange rate has a significant positive effect on the money supply so this result is proven by the previously assumed hypothesis. The results of this study are consistent with the study by Murad et al (2021), Leasiwal and Subhan (2021), Carissa and Khoirudin (2020), Sean et al (2019), Ningsih and Kristiyatnti (2018), Ichwani and Nisa (2021), Susmiati et al (2021), andAdeshola et al (2020). According to Carissa and Khoirudin (2020), the amount of money in circulation is seen through the supply of money, if the supply of money in a currency increases, the exchange rate will decrease.…”

“…On the other hand, if the value of the offer against the Rupiah decreases, the value will appreciate. Murad et al (2021), Leasiwal and Subhan (2021), Carissa and Khoirudin (2020), Sean et al (2018), Ningsih and Kristiyatnti (2016), Ichwani and Nisa (2021), Susmiati et al (2021), argues that currency exchange (exchange rate) has a positive relationship and has a significant effect on the money supply. The amount of money in circulation is seen through the supply of money, if the supply of money in a currency increases, then the exchange rate will decrease, on the other hand, if the supply of money decreases, the exchange rate will increase.…”

Impact of socioeconomic development on inflation in South Asia: evidence from panel cointegration analysis

“…When the exchange rate of domestic currency with the US$ increases, it alters domestic money supply through foreign remittance inflow, as when the FEXR depreciates, remittance inflow goes up that directly adds to the quantity of money in the circulation. The finding is in line with most of the literature including Abidemi and Malik (2010), Adu and Marbuah (2011), Bandara (2011), Monfared and Fetullah (2017) and Sean et al (2019), who stated a positive impact of FEXR on inflation in the long-run.…”

“…They found that a depreciation in the country’s domestic currency causes exports adversely in the short run, while positively in the long run. Sean et al (2019) examined the relations among inflation, the supply of money and the exchange rate in Cambodia applying the Bayesian vector autoregressive method for monthly data October 2009 – April 2018. They used the money-in-utility function and purchasing power parity and found that money supply induced depreciation in the exchange rate and led to inflation.…”

Do Interest Rate and Inflation Matter for Exchange Rate Fluctuation in Bangladesh? An ARDL Approach

“…Dilmaghani and Tehranchian (2015), on the other hand, alleged that a country with a higher domestic inflation rate faces devaluation of its currency value. The seminal work by Sean, Pastpipatkul, and Boonyakunakorn (2019) demonstrated that the increase in money supply causes inflation in Cambodia and the increased inflation depreciates its currency value in consequence. Similarly, Joof and Jallow (2020) argued that a 1% increase in the inflation rate in the Gambia result from a 0.39% devaluation of domestic currency value against the US dollar.…”