Estimating monetary policy rules for Malaysia: an optimal monetary conditions index

Based on the concept of the monetary conditions index (MCI) to underscore the important role of the interest rates parity, the paper attempts to estimate a model of optimal monetary policy for open emerging market economies. It is designed to shed a light of significance of the internal and external equilibrium and provide the basis for the analysis. The paper estimated the relative influence of interest rates and exchange rate on the output gap, the weights of real interest rates and real exchange rate, which are used to estimate the optimal monetary conditions index. The estimated weights are 1.6: 1, which can be used to specify operating target rule for monetary policy.

Modeling an Alternative Expression of Covered Interest Parity – in Inflation Targeting Economies of Emerging Asia

We establish an alternative form of expressing the covered interest parity model that incorporates the onshore and offshore foreign exchange forward market of inflation targeting economies of Emerging Asia, which provides the ability to identify if there is the occurrence of covered interest parity in foreign exchange forward markets

China’s Aid and Oil-for-Infrastructure in Nigeria: Resource-Driven or Development Motive?

China’s ascent influences the Western aid dynamic significantly and changes the landscape in aid-donor and aid-recipient relationship for resource-endowed countries in Africa. Similarly, within China-Africa relations, Nigeria established diplomatic relations with China in 2006 for a concessional oil-for-infrastructure plan to fill the development aperture. However, Nigeria opted out as political uncertainty and elite interest in rent-seeking supersedes development and well-being motive. We conclude that two interrelated causal factors – accountability and transparency – overwhelmingly obstruct Nigeria from optimising China interest in infrastructure development. The study recommends the review of National Planning Commission (NPC) 2007 ODA policy document on technical assistance, grants, and concessional loans to identify new problems and challenges associated with formulation and implementation of donor-assisted programmes

Model selection for a class of conditional heteroscedastic processes

This thesis investigates which information criteria (IC) is best for choosing a conditional heteroscedastic (CH) model from among rival autoregressive conditional heteroscedastic (ARCH) related models in finite samples. In addition, it also considers the central question: "Can we construct an IC procedure for selection between CH models that is optimal in small samples?" Using Monte Carlo methods, we construct small sample optimal procedures by introducing an optimization principle based onmaximizing the average probabilities of correct model selection (APCMS). In Chapter 3, we consider seven IC procedures based on penalized maximized conditional log-likelihood functions, namely, Akaike's IC (AIC), Schwarz's Bayesian IC (BIC), Hannan and Quinn's (HQIC) criterion, Theil's adjusted R2 criterion or residual variance criterion (RVC), Amemiya's prediction criterion (PC), Hocking's criterion (Sp) and the generalized cross validation criterion (GCV) in order to determine which one is the best IC in finite samples. The simulation study reveals some interesting small sample properties of these criteria, namely, RVC is the best IC for small samples selection problems but as the sample size increases, RVC loses its efficacy to AIC which becomescomparatively a better IC. BIC is clearly the worst IC procedure. Chapter 4 looks at how to construct these penalties in small samples, such that these optimaL-information criteria give good statistical properties. A useful property is the property of consistency, i.e., always choosing the correct model in large samples. Using grid search, the construction of these optimal penalties is based on a iarge Monte Carlo simulation study that involves pre-fixed parameter values for a portfolio of models for four sets of standard ARCH(q) and GARCH(p,q) models with normality assumptions for the underlying innovation process. A response surface model is then fitted to estimate an algebraic expression for the optimal penalty function for the ARCH(q) and GARCH(p,q) models respectively, based on Granger, King and White's (1995) definition of a general IC. These estimated prototype optimal information criteria are generically called Conditional Heteroscedastic IC (CHIC). In particular, three hybrids of CHIC are estimated, namely CHIC-A, CHIC-G and CHIC-P, for ARCH models, GARCH models and pooled ARCH and GARCH models respectively. We generalize Nishii's (1988) consistency results to allow us to demonstrate that the CHIC procedures are consistent. Hitherto, the construction of CHIC procedures is conditional on chosen non­ random parameter values for the data generating processes (DGPs). An improvement over this method without enforcing the conditioning of these parameter values, is torandomly make drawings from a prior distribution to select these parameter values for the models. In Chapter 5, we introduce a new class of optimal small sample procedures, namely SOP and POP based on unconditional small sample penalties. SOP is derived based on a summation optimization principle, and POP is derived based on a product maximizing method. A comparison between the relative performance of these optimal procedures with existing IC procedures indicates in particular, that SOP is the best procedure. The optimal small sample procedure also allows us to test whether theprobabilities of correct selection employing CHIC procedures are biased towards the pre-fixed parameter values chosen through a multi-point method. CIDC-A and SOP are also checked for the property of robust selection by changing the normality assumptions for the ARCH models in Chapter 6. In the first part of this study, we assumed the error innovations from a scaled Student's t distribution with four degrees of freedom and constructed the conditional log-likelihood function using a Student's t distribution. In the second part of the study, we examined making the wrong assumptions for the error innovations by misspecifying the conditional log­ likelihood functions. That is when the error was normal, we estimated a conditional log­ likelihood function for the Student's t distribution, and when the error is non-normal, we specified a normal conditional log-likelihood function. We found that both our optimal procedures, CIDC-A and SOP are efficacious to misspecified log-likelihood assumptions. Grose and King (1993) found that a selection criterion for autoregressive moving-average (ARMA) models can biasedly select a particular model due to the shape of the likelihood function. In Chapter 7, we examined whether our optimal procedure favours a GARCH(l,l) model when ARCH(q) models are the true models and compared its performance with IC procedures. This was done because many empirical studies favour the GARCH(1,1) model. Out optimal procedure suggets that GARCH(1,1) models are not unduly favoured when ARCH models are the true models. In general, the CHIC procedures and the optimal small sample procedures out­ perform all other existing IC in different model selection problems for choosing small sample ARCH and GARCH models. However, BIC is the worst performing IC as it has a penalty function that penalizes larger models very harshly. This suggests that BIC, which has been popularly applied in many areas of model selection problems, should not be used for problems involving CH models. One reason that BIC did not perform as well as our optimal IC procedures is because it has been built without considering the one­ sided information in the estimation of these CH models

THE STATE-AND-SPEED OF THE ECONOMIES IN ASEAN-5: A GEOMETRY ANALYSIS

The many unique findings on economic growth studies by the flying geese analysis (Kwan, 1994), the convergence-catching-up analysis (Lim and McAleer, 2003), and competitive index rankings by the World Economic Forum (WEF) and the International Institute for Management Development (IMD), all provide country rankings and comparisons only on one plane, i.e., to determine which country is doing best, better or worst. But we introduce a new measurement based on geometric planes that enables us to measure the "state and speed of the economy", to determine the actual "economic size" due to policy actions, and to evaluate macroeconomic policies' effectiveness and coherence in producing real economic growth.State of economy, economic size, policy-space

Exchange rate volatility and volatility asymmetries: an application to finding a natural dollar currency

Based on six daily spot nominal exchange rate returns denominated in the US dollar, viz-a-viz UK Pound, Japanese Yen, Swiss Franc, Canadian dollar, Australian dollar and Singapore dollar, this paper tries to find a natural Dollar currency by comparing the linear/nonlinear dynamics in the conditional variance of these bilateral exchange rate returns (time varying volatility vs. asymmetries). The characteristics of the unconditional distribution of the FX returns justified the use of the GARCH class of models of conditional volatility. Strong time varying symmetric effects are apparent in all the series examined, especially in the Australian dollar. Further asymmetric effects in unexpected appreciations and depreciations of currencies are examined based on the GJR model, the ST GARCH model and the ANST-GARCH model (which encompasses several asymmetric models). The estimates of asymmetric models show weak evidence of asymmetries in most of the currencies, except in the Japanese Yen and UK Pound. Further findings show that the Japanese Yen is a non-natural Dollar country. However, there may possibly exist some mild deterministic asymmetric effect in the UK Pound. Based on the symmetric GARCH model, a trader/investor may consider Australian dollar as the relatively most 'likable' currency, i.e. relatively the least volatile currency and relatively the most synchronized with the US dollar.

A tale of Asian exchange rate management: Romance of the three currencies

Asian currencies lack regional policy coordination and are therefore subject to volatilities such as the Asian currency crisis of 1997/99. As the Asian currencies have already been observed to be 'flying-in-unison', a stable exchange rate arrangement can be helpful as the next step of evolution for regional financial stability. We consider that creating a cluster effect from coordinated efforts/policies of policy-makers can lead to regional exchange rate stability. To demonstrate this cluster effect, a three-party-game is computed for an Asian bloc, viz-á-viz US dollar and the Euro, based on a Nash and a cooperative equilibrium. The cluster effect would generate external and internal pressures that work towards the formation of a regional currency, although the exact form of exchange rate regime would have to await political consensus. There are substantial welfare gains within Asia network economy through currency cooperation. The formation of an Asian currency bloc would also create counter-balance to the current dominance of the US dollar and the Euro. Like the epic story of Three Kingdoms who sought hegemony in Chinese history, the Asian currency bloc will contend with many possible outcomes of competition as well as cooperation.Exchange rate arrangement Flying-in-unison Cluster effect Policy cooperation