The East Asian financial crisis indicated that one of the factors that played a critical role in affecting the exchange rate of a country was its current account balance. This paper attempts to investigate this hypothesis. The Singaporean dollar (SD) and the Malaysian ringgit (RM) against the yen are taken as case studies. Our analysis is based on the recent cointegration method and we examine two issues. First, whether the exchange rates are cointegrated with the fundamentals as predicted by economic theory. Our focus was to investigate whether the exchange rate movements are affected by the economic fundamentals, particularly the current account balance. Our findings suggest that the model fits the data well. Secondly, we wanted to test the validity of our model for forecasting future exchange rates. The findings show that the model does produce good in-sample as well as out-of-sample forecasts.

This paper presents and tests an augmented monetary model that includes the effect of stock prices on the bilateral exchange rates. The model is applied to the ringgit/US dollar (RM/US) and ringgit/Japanese yen (RM/JY) exchange rates. The empirical analysis is conducted by the Johansen method of cointegration. Using the data from the recent float that ends with 1996:Q4, the study is motivated, among others, by an interesting preliminary finding that although the augmented monetary model is cointegrated, it is subject to parameter instability and that the parameter time dependency can be attributed at least partly to a particular subset of the variables in the system including stock prices. We find that a restricted VAR modelwhich imposes exogeneity restrictions on I(1) variables, such as stock prices, among others, exhibits both cointegration and parameter stability. In addition, we demonstrate that exchange rate adjusts to clear any disequilibrium in the long-run relationship. The empirical findings tend to suggest that the equity market is significant in affecting the exchange rate and in explaining at least in part the parameter instability evidenced in the cointegrating system. Hence, we conclude that models of equilibrium exchange rate should be extended to include equity markets in addition to bond markets.

This study examines the demand for broad money (M2) in China using the autoregressive distributed lag (ARDL) cointegration framework. The results based on the bounds testing procedure confirm that a stable, long-run relationship exists between M2 and its determinants: real income, inflation, foreign interest rates and stock prices. Importantly, our results reveal that stock prices have a significant wealth effect on long- and short-run broad money demand; its omission can lead to serious misspecifications in the money demand function (MDF). This finding is consistent with the notion that asset inflation (deflation) has systematic influence on the pattern of monetary aggregates.