The purpose of this study was to assess the effect of monetary policy on exchange rate in Rwanda. In conducting this research, four objectives were to assess the effect of monetary stock on exchange rate in Rwanda, to assess the effect of interest rate on exchange rate in Rwanda, to analyze the effect of oil prices on exchange rate in Rwanda and finally to examine the effect of government expenditure on exchange rate in Rwanda. To achieve these objectives, literature was reviewed on the subject matter including definitions of key concepts, conceptual review, theoretical framework, conceptual framework and research gap analysis; additionally this study used quantitative research design through the interpretation of findings about the effect of monetary policy on exchange rate in Rwanda during the period of 2000 up to 2022. Also, thus study considered only using secondary data.
Monetary policy has a strong influence over interest rates in the economy, including the lending and deposit rates faced by households and businesses.
Table of Contents
1.1 Statement of the problem
1.2. Objectives of the study
1.2.1. General objective
1.2.2. Specific objectives
1.3 Significance of the Study
2.1. Theoretical review
2.1.1. Fischer’s Effect Theory
2.1.2. Unit pricing theory
2.1.3. Classical theory of interest
2.2. Conceptual framework
3.1. Research design
3.2. Data collection methods
3.2.1. Sources of data
3.2.2. Secondary data
3.3. Data processing techniques
3.3.1. Model specification
3.3.2. Descriptive statistics
3.3.3. Unit Root
3.3.4. Co-integration
3.3.5. Post estimation Test
3.3.6. Heteroskedasticity
3.3.7. Autocorrelation
4.1 Data analysis and results interpretation
4.1.1 Descriptive statistics
4.1.2 Unit root tests
4.1.3. Regression results
4.1.4. Error autocorrelation (LM)
5.1. Conclusion
5.2. Recommendations
Research Objectives and Focus Areas
The primary objective of this research is to evaluate the impact of various monetary policy instruments on the exchange rate in Rwanda from 2000 to 2022, utilizing secondary data and quantitative econometric analysis.
- Assessment of the relationship between monetary stock and exchange rate fluctuations.
- Examination of the influence of interest rates on currency exchange dynamics.
- Analysis of the effect of global oil price volatility on the Rwandan exchange rate.
- Investigation into the impact of government expenditure on monetary outcomes and exchange rates.
Excerpt from the Book
2.1.1. Fischer’s Effect Theory
The International Fisher Effect (IFE) is an economic theory stating that the expected disparity between the exchange rate of two currencies is approximately equal to the difference between their countries' nominal interest rates. The IFE is based on the analysis of interest rates associated with present and future risk-free investments, such as Treasuries, and is used to help predict currency movements. This is in contrast to other methods that solely use inflation rates in the prediction of exchange rate shifts, instead functioning as a combined view relating inflation and interest rates to a currency's appreciation or depreciation.
The theory stems from the concept that real interest rates are independent of other monetary variables, such as changes in a nation's monetary policy, and provide a better indication of the health of a particular currency within a global market. The IFE provides for the assumption that countries with lower interest rates will likely also experience lower levels of inflation, which can result in increases in the real value of the associated currency when compared to other nations. By contrast, nations with higher interest rates will experience depreciation in the value of their currency. The Fisher Effect claims that the combination of the anticipated rate of inflation and the real rate of return are represented in the nominal interest rates. The IFE expands on the Fisher Effect, suggesting that because nominal interest rates reflect anticipated inflation rates and currency exchange rate changes are driven by inflation rates, then currency changes are proportionate to the difference between the two nations' nominal interest rates.
Summary of Chapters
1.1 Statement of the problem: Discusses the role of central banks in managing economic fluctuations and identifies the research gap regarding the impact of monetary policy instruments on Rwanda's exchange rate given historical trends.
1.2. Objectives of the study: Outlines the overarching mission to assess monetary policy effects and specifies the individual goals related to money stock, interest rates, oil prices, and government expenditure.
1.3 Significance of the Study: Describes the value of the research for stakeholders, including the National Central Bank of Rwanda and future academic researchers.
2.1. Theoretical review: Examines established economic theories, including Fischer's Effect, Unit pricing theory, and Classical theory of interest, providing a foundation for the empirical investigation.
2.2. Conceptual framework: Defines the relationship between independent variables (monetary stock, interest rate, oil prices, government expenditure) and the dependent variable (exchange rate).
3.1. Research design: Details the quantitative research approach and the use of econometric modeling to interpret data collected from 2000 to 2022.
3.2. Data collection methods: Describes the reliance on secondary data sources such as the National Bank of Rwanda and the World Bank to analyze annual trends.
3.3. Data processing techniques: Describes the statistical methods employed, including regression analysis, unit root tests, and post-estimation diagnostics to ensure data integrity.
4.1 Data analysis and results interpretation: Presents the empirical findings derived from the collected data, including regression outputs and diagnostic tests regarding stationarity and cointegration.
5.1. Conclusion: Synthesizes the results, noting that while monetary tools influence economic metrics, the specific relationship with exchange rates requires nuanced monitoring by the central bank.
5.2. Recommendations: Proposes actionable strategies for the National Central Bank, such as adjusting money supply and enhancing investment in secured assets.
Keywords
Monetary policy, exchange rate, Rwanda, interest rate, money stock, inflation, unit root, cointegration, regression analysis, government expenditure, secondary data, economic growth, central bank, econometric model, fiscal policy.
Frequently Asked Questions
What is the core focus of this research?
The work primarily investigates the influence of domestic monetary policy—specifically money supply, interest rates, and external factors like oil prices—on the volatility of the exchange rate in Rwanda.
What are the primary thematic fields covered?
The study spans monetary economics, exchange rate theory, macroeconomic policy management, and econometric modeling of development indicators.
What represents the main research objective?
The main goal is to conduct an empirical assessment of how specific monetary policy instruments have influenced the Rwandan exchange rate over the period 2000–2022.
Which scientific methods are utilized?
The study employs a quantitative research design utilizing secondary time-series data, analyzed through econometric regression models, unit root tests (ADF), and Cointegration (Johansen) tests.
What does the main body of the work cover?
The core sections provide a comprehensive theoretical literature review, the derivation of a conceptual framework, a detailed model specification, and the empirical interpretation of regression results.
Which keywords characterize this document?
Key terms include monetary policy, exchange rate, econometric modeling, Rwanda, interest rates, and statistical unit root testing.
How were the variables for the econometric model selected?
The variables (Money Stock, Interest Rate, Oil Prices, and Government Expenditure) were selected based on their theoretical relevance to exchange rate movements in developing nations as identified in the literature review.
What is the conclusion regarding the long-term relationship between variables?
The Johansen cointegration test results led to the rejection of the null hypothesis, concluding that a statistically significant long-run relationship exists between the analyzed monetary variables and the exchange rate.
- Citar trabajo
- Anonym (Autor), 2024, Effect of monetary policy on exchange rate in Rwanda, Múnich, GRIN Verlag, https://www.grin.com/document/1452733
