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COPYRIGHT 2001 American Society for Competitiveness
ABSTRACT
A number of models have been proposed for forecasting foreign exchange currency rates (XRs) variations. A present study, utilizing linear and nonlinear regression models, finds inconsistencies in the claim that the predictive variables, (GDP, inflation, unemployment rate, and interest rates) can each singularly provide predictive measures of XR variations. Although inflation rates with seemingly strong co-linearity with interest rates do appear to explain the XR variations for several countries, these relationships are both positive and inverse, making the reliance on inflation rates as an XR predictor inconclusive. The predicative variables impact the XR forecasting relations differently, in part due to the problem of size, and, thus, there is an absence of a universally applicable model for XR forecasting. This is tantamount to each country developing its own XR forecasting model.
INTRODUCTION
The operations management literature characterizes a winning competitiveness in the heroic championship of quality, price, and flexibility. Behavioral and human resource experts believe that competitive attainability is possible through effective cross-cultural communication and political risk abatement. Functional strategies are believed to provide a coordinated co-production of strategic objectives. Likewise, economics and finance are also bestowed important roles. As with modern art and music, each discipline performs its own function, not with the intention to supplant the other, but harmoniously. Foreign exchange (FEX) fluctuations can pose economic, transaction, and translation risks to a firm's finances and, thus, to its competitiveness. FEX fluctuations can also impact a country's economic macroeconomic variables, and its sociopolitical and economic objectives. Thus, the importance of forecasting on many of the factors that impact strategy planning and decision-making should not be de-emphasized.
Factors such as interest rates, GNP growth, inflation and unemployment are considered as explanatory variables. However, we have attempted to examine the simultaneous impact of these factors on the exchange rates (XRs). As such, our approach is more relevant to many real-world phenomenon, judging that effect is induced by the simultaneous impact of several factors. This approach could provide a formidable basis for business firms and speculators for investment decisions, and avert financial and foreign exchange exposures. Approximately two trillion dollars are transacted daily in the Futures Markets and Foreign Currency Markets for speculative, precautionary, and transaction purposes. While the extent of governments' currency interventions is unknown, it has nevertheless contributed to this ever-increasing volume.
The GATT's Paraguay Round has swayed trade restrictions to voluntary export restraint (VER) by countries with consistent positive trade balance, or BOP. However, similar to quotas, the host country is not insulated from the negative economic consequences of VER, (Kreinen, 1998). In fact, quotas could be more detrimental to the economy. Negative BOP leads to capital inflow, i.e., a country must borrow from foreigners to pay for excess imports. As with other policy options, imports may respond to a country's anti-inflationary objectives. Virtually, all countries are dependent on imports to keep their industries in operation and to satisfy their consumers. Ipso facto, other than the national security objectives, health and welfare, and infant industry arguments, trade restrictions cannot be defended, since such restrictions would hamper economic growth or social welfare. In some cases, however, trade restrictions have paradoxically led to industrialization, especially due to the desire of MNCs seeking international monopolies. Trade restrictions may also aggravate economic objectives, vis-a-vis business cycles, and economic development.
THE STATE OF THE LITERATURE
Extensive research into currency exchange literature uniformly concludes that the foreign exchange currency (FEX) affects the domestic economy and international trade, and, thus, the competitiveness of nations. Likewise, foreign XR forecasting has a significant impact on the firm's cash flows, and, thus, on its financial and foreign exchange exposures. Such exposures may impact the firm's competitiveness and marketing and resource strategies. In general XRs are affected by many factors, such as the country's BOP, political stability, productivity and income growths, as well as, interest rates, inflation, the government monetary and fiscal policies, and macroeconomic reforms. Major international crises, such as that which occurred in the fall of 1997 in Southeast Asia, can also have an impact on foreign exchange market.
Ceteris paribus, an increase in demand for currency (i.e., a forward demand shift) will cause foreign XRs to move upward, or appreciate, and vice versa. The principles also state that, ceteris paribus, an increase in currency supply will cause FEX currency to depreciate, and vice versa. Therefore, the causes of FEX currency appreciation are an increase in demand, a decrease in supply, ceteris paribus, and vice versa, i.e. the market forces. Aware of this economic phenomenon, governments resort to currency interventions by buying and selling currencies to induce the desired results, when faced with the BOP problems. This mechanism is similar to the central bank's open market activities, i.e., bond transactions to adjust the money supply and interest rates. Conversely, an inappropriate decision to revalue or devalue currency will respectively create surplus or shortage of currency in the world market.
The relationship between the interest rate and real XR is shown by:
(1) EP/Pw = g + vr
where, EP is the foreign price of US goods, r is the interest rate and g and v are constants.
Because of the importance of the relationship between...
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