How The Monetary Policies Affect The Exchange Rate Movement

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The mainly methodology in this project are Augmented Dickey-Fuller (ADF) Unit Root Test, ordinary least square regression (OLS) and Vector autoregression (VAR) model, which utilize in this paper to examine the relationships between the exchange rate and various economic fundamental variables. About econometric software, where it is used is Stata. 4.1 Aims and objectives Due to the Britain perform double tight fiscal and monetary policy is very firm. Control interest rate and stabilize the economy have played a certain impact on the sterling. For this project, the aim study is to find the answers for the main question, which is how the monetary policies affect the exchange rate movement. 4.2 Theoretical underpinning -- Flexible-price monetary model Flexible-price monetary model which is the earliest establishment of the modern theory, and exchange rate determination is the most basic model. It represents a valuable addition to exchange rate theory because it explicitly introduces relative money stocks into the picture as determinants of the relative prices which in turn determine the exchange rate. And there is a conventional money demand function given by: (1) In this function, m is the log of the domestic money stock, p is the log of the domestic price level, y is the log of domestic real income and r is the nominal domestic interest rate (Pilbeam, 2003). A similar relationship holds for the foreign money demand function
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