International Fisher Effect: Exchange Rates & Interest Rates in Serbia & EU, Slides of Life Sciences

Download International Fisher Effect: Exchange Rates & Interest Rates in Serbia & EU and more Slides Life Sciences in PDF only on Docsity! ЕКОНОМИКА Vol. 66, april-june 2020, № 2 ISSN 0350-137X, EISSN 2334-9190, UDK 338 (497,1) 49 ©Друштво економиста “Економика” Ниш http://www.ekonomika.org.rs Marijana Joksimović1 College of Academic Studies “Dositej”, Belgrade Dušan Joksimović2 University of Criminal Investigation and Police Studies, Belgrade Biljana Grujić Vučkovski3 Institute of Agricultural Economics, Belgrade A TEST OF INTERNATIONAL FISHER EFFECT: RESEARCHING FROM SERBIA AND THE EUROPEAN UNION4 Abstract The aim of this paper is to explore the International Fisher Effect (IFE) between Serbia and European Union (EU) in period between 2004 and 2015. The authors in this paper explore the IFE by applying regression analysis. They were used historical annual data for exchange rates, real interest rate and inflation, in this research. Like a home country and foreign country the authors were used each of these areas (Serbia and EU) like interchangeably and track the trail of the effect. Explore was based on the time series of observed annual data in period between 2004 and 2015. The authors were used the data of authorized central banks from databases: the World Bank, the National Bank of Serbia and the European Central Bank. Regression analysis was performed using a software package SPSS 20. The contribution of this paper is reflected in the obtained results.The results show that a 1% increase in the nominal interest rate differential, on average, lead to approximately a 0.3% offsetting change in the exchange rate in both cases (Serbia- home EU-foreign and EU-home Serbia-foreign).The coefficients of determination R2 are very low, also in both cases. Only 3.3% of the annual changes in the RSD/EUR exchange rate and 4.2% of the annual changes in the EUR/RSD exchange rate can be explained by the nominal interest differentials. Therefore, about 96% of the annual changes in the exchange rates depend on other factors. Key words: IFE (International Fisher Effect), Inflation, Interest Rates, Exchange Rates, Regression Analysis, Serbia and European Union. JEL classification: C00, E43 1 joksimovicmarijana80@gmail.com; ORCID ID 0000-0002-5939-5137 2 dusan.joksimovic@kpu.edu.rs; ORCID ID 0000-0001-7972-1991 3 biljana_g@iep.bg.ac.rs; ORCID ID 0000-0003-2588-4888 4 Paper was financed by the Ministry of Education, Science and Technological Development of the Republic of Serbia. ORIGINAL SCIENTIFIC ARTICLE doi: 10.5937/ekonomika2002049J Received: March, 25. 2020. Accepted: April, 24. 2020. P. 49-61 ©Друштво економиста “Економика” Ниш http://www.ekonomika.org.rs 50 ЕКОНОМИКА ТЕСТ МЕЂУНАРОДНОГ ФИШЕРОВОГ ЕФЕКТА: ИСТРАЖИВАЊЕ ИЗ СРБИЈЕ И ЕВРОПСКЕ УНИЈЕ Апстракт Циљ овог рада је истраживање Међународног Фишеровог ефекта (IFE) између Србије и Европске уније у периоду 2004-2015 године. Аутори у овом раду IFE истражују регресионом анализом. Користили су се историјски подаци курса РДС и ЕУР, реалне каматне стопе и инфлације посматраних земаља. Свака од поменутих земаља (Србија и ЕУ) су се наизменично користилие као матична и страна земља. Истраживање се заснивало на временским серијама посматраних података од 2004. до 2015. године. Коришћени су подаци овлашћених централних банака из база: Светске банке, Народне банке Србије и Европске централне Банке. Регресиона анализа извршена је помоћу програмског пакета СПСС 20. Допринос овог рада се огледа у добијеним резултатима. Резултати показују да раст номи- налне каматне стопе од 1%, у просеку, доводи до промене девизног курса за око 0,3% у оба случаја (Србија – ЕУ и ЕУ – Србија). Коефицијент детерминације Р2 је веома мали, такође у оба случаја. Само 3.3% годишње промене курса РСД/ЕУР и 4.2% годишње промене курса ЕУР/РСД може бити објашњено променом номи- налне каматне стопе. Око 96% годишње промене курса зависи од других фактора. Кључне речи: IFE (Међународни Фишеров ефекат ), инфлација, ка- матне стопе, девизни курсеви, регресиона анализа, Србија и ЕУ Introduction Stable financial institutions are necessary for the country’s economy to develop. Accordingly, banks play an extremely important role in this process because economic growth requires an efficient banking sector that would provide macroeconomic stability (Muhović, Subić, 2019). The authors (Ercegovac et al., 2019) state that the banking sector is the most significant segment of the financial system of any modern and developed economy. As such, it enables the entire economic system to function undisturbed, contributing to sustainable economic growth and development. Serbia is obliged to adjust its legal framework with other EU members (Grujić, Joksimović, 2019). The International Fisher Effect (IFE) theory suggests that foreign currencies with relatively high nominal interest rates will tend to depreciate because higher nominal interest rates reflect expected rate of inflation (Korab, Svatopluk, 2013; Anokye, Ofori, 2017; El Khawaga et. al., 2013; Ucak et. al., 2014; Uyaebo et. al., 2016; He, 2018). In this paper, regression results for empirical testing of IFE showed that nominal interest rate differentials had positive but no significant effect on changes in exchange rate between Serbia and EU. The authors have already applied regression analysis to their earlier research (Joksimovic et. al., 2018) and analyzed money markets (Kaludjerovic et. al., 2016). The relationship between nominal interest rates and expected inflation is crucial in the global financial markets. The International Fisher Effect has suggested that nominal interest rates and expected inflation move together, as one follows the other (Shalishali, Maurice, 2012). 53 ЕКОНОМИКА ©Друштво економиста “Економика” Ниш http://www.ekonomika.org.rs ЕКОНОМИКА method. The result of this study shows that Fisher effect for selected EU member states are more than one. This value might be explained by the agreement regarding taxation of the interest income. Uyaebo et all. (2016) tested the validity of the Fisher hypothesis in Nigeria during the period 1970 – 2014. The Gregory and Hansen Co-integration test confirmed the existence of a long-run relationship between nominal interest rates and inflation, albeit with a structural break in October 2005. The obtained Fisher coefficient in the cointegrating relation was 0.08, implying a weak form of Fisher effect in the long-run. On the basis of these findings, they upheld a weak Fisher effect in the long-run and non- existence of Fisher effect in the short-run. This implied that short term nominal interest rate is a good characterization of monetary policy stance. Also, the obtained partial Fisher effect indicated that changes in monetary policy are capable of altering the long term real interest rate and influencing economic growth through the interest rate channel. The main purpose of study Varamini et. al. (2017) is to examine if the International Fisher Effect holds between Mexico and the United States for the period from Q1: 2005 through Q3: 2016. The results of this study indicate a significant relationship between the interest rate differentials and the changes in the currency value between the two countries. The regression model suggest that the independent variable, change in interest rate differential, has a correlation to change in exchange rates over the period observed. Even though the result of this study provides some support in favor of the International Fisher effect, the low value of the R-squared would suggest there are other left-out variables that have an effect on change in exchange rates between the two countries. These variables could be inflation, confidence in the currencies, expectations, currency risk, transaction costs, current account on balance of payments and economic growth, among others. Despite the existence of such factors that could positively and negatively affect the changes in exchange rate between the United States and Mexico, the change in interest rate differential must be included as an important determinant of the currency value. Methodology and data collection Like we said IFE is a combination of two theories: the generalized version of the Fisher effect theory (GFE) and the relative version of the Purchasing Power Parity theory (PPP). The Fisher effect theory states that the nominal interest rate in a country is determined by the real interest rate and by expected inflation rate as follows: So, if we analyze two countries, home (index h) and foreign (index f) country, we have ©Друштво економиста “Економика” Ниш http://www.ekonomika.org.rs 54 ЕКОНОМИКА Divided equation (2) by (3), assume that , we obtained the generalized version of the Fisher effect theory (GFE): The GFE theory states that if the real interest rate is equal between different countries, it follows that the differences in their observed nominal interest rates must arise from differences in expected inflation. The PPP theory states that the exchange rate between any two countries (in our case between home and foreign country) will adjust to reflect changes in the price levels of the same two countries, as follows: where is the home currency value of one unit of foreign currency at time t+1, is the home value of one unit of foreign currency at time t, is the inflation rate in the home country at time t, is the inflation rate in the foreign country at time t. By combining equations (4) and (5), and taking into account that expected inflation rate at time t is inflation rate at time t, (E(i)t= it), we obtained IFE relation: where is the home currency value of one unit of foreign currency at time t+1, is the home currency value of one unit of foreign currency at time t, is the nominal interest rate in the home country at time t, is the nominal interest rate in the foreign country at time t. IFE relation shows the dependence changes of exchange rate the home currency value of one unit of foreign currency on the nominal interest rate in the home and foreign country. If then and we expect an appreciation of the foreign currency. If then and we expect a deprecation of the foreign currency. A test IFE by applying linear regression analysis takes the following form: 55 ЕКОНОМИКА ©Друштво економиста “Економика” Ниш http://www.ekonomika.org.rs ЕКОНОМИКА where is error term. If value and are in the 95% confidence interval for obtained value for i from linear regression analysis, then that linear regression analysis is not disprove influence IFE between analysed countries. We were tested IFE by applying linear regression analysis between Serbia and EU, in period between 2004 and 2015 (for currency value between 2004 and 2016). Like a home country and foreign country we used each of these areas like interchangeably. Test was performed using a software package SPSS20. We used historical annual data for currency value, real interest rate and inflation for Serbia and EU, in period between 2004 and 2015 (for currency value between 2004 and 2016). Values for nominal interest rate , we obtained from equation (1), with approximation , as follows: Taking into account that expected inflation rate at time t is inflation rate at time t, (E(i)t= it), we obtained that at time t nominal interest rate is equal: Tabular and graphical views of the historical annual data used are below. Table 1: Used historical data Year Curr. value RSD/ EUR Curr. value EUR/RSD The real int. rate, Serbia (%) The inflation Serbia (%) The nom. int. rate Serbia (%) The real int. rate EU (%) The inflation EU (%) The nom. int. rate EU(%) 2004 72.6937 .0138 -5.1640 11.0260 5.8620 3.0000 2.1000 5.1000 2005 82.9904 .0120 -10.3990 16.1200 5.7210 3.1000 2.2000 5.3000 2006 84.1101 .0119 -6.4440 11.7240 5.2800 4.0000 2.0000 6.0000 2007 79.9640 .0125 -3.9640 6.3920 2.4280 4.7500 2.5000 7.2500 2008 81.4405 .0123 -2.7990 12.4110 9.6120 4.0000 2.8500 6.8500 2009 93.9517 .0106 -.9430 8.1170 7.1740 2.2000 .5000 2.7000 2010 103.0431 .0097 .8100 6.1430 6.9530 1.7500 1.5000 3.2500 2011 101.9502 .0098 2.5870 11.3370 13.9240 2.0000 2.6500 4.6500 2012 113.1277 .0088 3.5630 7.3300 10.8930 1.6000 2.4500 4.0500 2013 113.1369 .0088 3.9540 7.6940 11.6480 1.1000 1.5000 2.6000 2014 117.3060 .0085 4.2030 2.0820 6.2850 .5000 .3000 .8000 2015 120.7328 .0083 3.1300 1.3920 4.5220 .3000 .1000 .4000 2016 123.1179 .0081 - - - - - - Source: The European Central Bank, The National Bank of Serbia and The World Bank ©Друштво економиста “Економика” Ниш http://www.ekonomika.org.rs 58 ЕКОНОМИКА Results and discussion Like we said, linear regression of IFE analysis takes form (7): where is error term. Testing the parameters of IFE using this regression model is in fact testing the alternative hypothesis , against the null hypothesis , The alternative hypothesis will be accepted if the hypothetical values of and , , lie outside their respective acceptance regions. In that case we can say that there is no effect of IFE between the observed areas. The alternative hypothesis cannot be accepted if the hypothetical values of and , , lie within their respective acceptance regions. In that case we cannot say that there is no effect of IFE between the observed areas. The results of the regression analyzes are given in the following Table 2. Table 2: IFE regression analysis output Model Value 95% Confidence Interval t value p value R2 Durbin- Watson S e r b i a - home EU-foreign Constant Coefficient 0.037 0.292 (-0.02-0.093) (-0.829-1.412) 1.451 0.580 0.177 0.575 0.033 1.772 EU-home S e r b i a - foreign Constant Coefficient -0.032 0.313 (-0.082-0.018) (-0.735-1.360) -1.433 0.665 0.182 0.521 0.042 1.800 Source: Author calculation The results obtained in both cases (Serbia-home EU-foreign and EU home Serbia foreign) show: -the values of and are within 95% confidence interval, so, we cannot say that there is no effect of IFE between Serbia and EU, with the significance level of 5%, respectively cannot be rejected in both cases; 59 ЕКОНОМИКА ©Друштво економиста “Економика” Ниш http://www.ekonomika.org.rs ЕКОНОМИКА - a 1% increase in the nominal interest rate differential, on average, lead to approximately a 0.3% offsetting change in the exchange rate in both cases; - the coefficients of determination R2 are very low, namely only 3.3% of the annual changes in the RSD/EUR exchange rate and 4.2% of the annual changes in the EUR/RSD exchange rate can be explained by the nominal interest differentials. Graphs of regression analyzes are given below (Figure 9., and Figure 10.). Figure 9 (left): Relative changes of exchange rate RSD/EUR Serbia-home, EU-foreign; Figure 10 (right): Relative changes of exchange rate EUR/RSD EU-home, Serbia-foreign Source: Author calculation Conclusion In this paper we explored International Fisher Effect (IFE) by applying regression analysis between Serbia and European Union. We used historical annual data for exchange rates, real interest rate and inflation for Serbia and EU, in period between 2004 and 2015, and we tested IFE using regression analysis. Like a home country and foreign country we used each of these countries like interchangeably and track the trail of the effect. Explore was based on the time series of observed data by 2004 to 2015. We used the data from National bank of Serbia, World Bank and European Central Bank. Our contribution is reflected in the fact that so far there has been no analysis of the Fisher effect in the observed period between Serbia and the EU. Also, our contribution is the results obtained. Namely, the results show that a 1% increase in the nominal interest rate differential, on average, lead to approximately a 0.3% offsetting change in the exchange rate in both cases (Serbia-home EU-foreign and EU-home Serbia-foreign). ©Друштво економиста “Економика” Ниш http://www.ekonomika.org.rs 60 ЕКОНОМИКА The coefficients of determination R2 are very low in both cases. Only 3.3% of the annual changes in the RSD/EUR exchange rate and 4.2% of the annual changes in the EUR/ RSD exchange rate can be explained by the nominal interest differentials. Therefore, about 96% of the annual changes in the exchange rates depend on other factors. References Anokye M. A., & Ofori, D. (2017). Validity of International Fisher Effect in the West African Monetary Zone. 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