The Impact of Monetary Policies on the Exchange Rate: A GMM Approach

Document Type : Research Paper


1 M.A in Economics, University of Mazandaran, Iran

2 Associate Professor, Economics Department, University of Mazandaran, Iran


his paper investigates the impact of monetary policies on the exchange rate of selected developing countries during the period 2001-2010. For this purpose, in addition to the theoretical explanation, dynamic panel data based on the generalized method of moments (GMM) have been used to estimate the model. Our findings indicate that the lag of exchange rate variable has a positive and significant effect on the exchange rate. This result reflects the dynamics of the exchange rate over time. Additionally, this paper indicates that the coefficient of liquidity as an indicator of monetary policy is positive and significant. Moreover, GDP, inflation, and exports of goods and services have negative, positive, and negative effects on the exchange rate, respectively, and all are statistically significant. Paying more attention to the exchange rate and the optimal control of liquidity in the economy is suggested as a policy recommendation in this research.


  1. Persian

    1. Taghavi, M & Mohammadi, M. (1390). ‘Factors affecting exchange rates and balance of payments in the economy (the monetary approach)’. Journal of Quantitative Economics, 2: 51-72.
    2. Jafari Samimi, A. & Tehranchian, A. (1383). ‘The effects of optimized monetary and fiscal policies on major macroeconomic indicators in Iran: An Application of Optimal Control Theory’. Economic Research Journal, 65: 232-213.
    3. Jalili, Z. (1392). ‘Dynamics of gold demand and the factors affecting it: panel data’. Journal of Economic Modeling, 4: 120-103.
    4. Jafari Samimi, A, Elmi(Mila), Z. and zaruki, Sh. (1392). ‘Evaluation of effectiveness of monetary policy’s instruments in states with a dynamic panel data and GMM system’. Journal of Economic Research, 1: 79-61.
    5. Kazerooni, A., Rezazadeh, A. and Feshari, M. (1388). ‘Monetary approach to the nominal exchange rate: A Case Study of Iran’. Journal of Economic Sciences, 1: 1.
    6.  Mohseni zunuzi, S. (1390). ‘Monetary policy and asset prices in the economy of Iran’. Journal of Monetary Economics and Finance, 2: 86-120.
    7. Noferesti, M. (1384). ‘The effect of monetary and currency policy on the economy and foreign exchange within a dynamic macro-econometric model’. Economic Research, 70: 1-29.
    8. Hushmand, M., daneshnia, M., Shahrivar, S., Qizilbash, A. and Eskandari Pour, Z. (1391). ‘Relationship between monetary policy and exchange rate in Iran’. Journal of Quantitative Economics, 272: 109-1.



    1. Acheampong, I.K. (2007). ‘A monetary approach to Exchange Rate Liberalisation regime in Ghana’. International Journal of management Research and Technology, 1(1).
    2.  Adalid, R., and Detken, C. (2007). Liquidity shocks and asset price boom/bust cycles (No. 0732). European Central Bank.
    3.  Anderson, T.W., and Hsiao, C. (1982). ‘Formulation and estimation of dynamic models using panel data’. Journal of econometrics, 18(1), 47-82.
    4.  Arellano, M. and Bond, S. (1991). ‘Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations’. The review of economic studies58(2), 277-297.
    5.  Arellano, M. (2002). ‘Sargan's Instrumental Variables Estimation and the Generalized Method of Moments’. Journal of Business & Economic Statistics, 20(4).
    6.  Assenmacher, K. and Gerlach, S. (2008). ‘Monetary Policy, Asset Prices and Macroeconomic Conditions: a Panel-VAR Study’. National Bank of Belgium.
    7.  Baltagi, B. (2008). Econometric analysis of panel data (Vol. 1). John Wiley & Sons.
    8.  Bernanke, B.S. and Gertler, M. (1995). Inside the black box: the credit channel of monetary policy transmission (No. w5146). National bureau of economic research.
    9.  Biorn, E. and Klette, T.J. (1998). ‘Panel data with errors-in-variables: essential and redundant orthogonality conditions in GMM-estimation’. Economics Letters, 59(3), 275-282.


    1.  Bond, S.R. (2002). ‘Dynamic panel data models: a guide to micro data methods and practice’. Portuguese economic journal1(2), 141-162.
    2.  Bordo, M.D., and Wheelock, D.C. (2004). Monetary policy and asset prices: a look back at past US stock market booms (No. w10704). National Bureau of Economic Research.
    3.  Calvo, G.A., Reinhart C.M. and Vegh, C.A. (1995). ‘Targeting Real Exchange Rate: Theory and Evidence’. Journal of Development Economics, 47: 97-133.
    4.  Conway, P. (2012). ‘The exchange rate as nominal anchor: A test for Ukraine’. Journal of Comparative Economics40(3), 438-456.
    5.  Caporale, G.M., Cipollini, A. and Demetriades, P.O. (2005). ‘Monetary policy and the exchange rate during the Asian crisis: identification through heteroscedasticity’. Journal of International Money and Finance24(1), 39-53.
    6.  De Grauwe, P. (2000). ‘Exchange Rate in Search of Fundamental Variable’. Centre for Economic Policy Research, Discussion Paper No.1073.
    7.  Duran, M., Özcan, G., Özlü, P. and Ünalmış, D. (2012). ‘Measuring the Impact of Monetary Policy on Asset Prices in Turkey’. Economics Letters, 114(1), 29-31.
    8.  Edwards, S. (1989). Real exchange rates, devaluation, and adjustment: exchange rate policy in developing countries. Cambridge, MA: MIT press.
    9.  Forni, M. and Gambetti, L. (2010). ‘The dynamic effects of monetary policy: A structural factor model approach’. Journal of Monetary Economics, 57(2), 203-216.
    10.  Hansen, L.P. (2001). ‘Generalized method of moment’s estimation: a time series perspective’. International Encyclopedia of Social and Behavioral Sciences.
    11.  Levin, A., Lin, C.F. and James Chu, C.S. (2002). ‘Unit root tests in panel data: asymptotic and finite-sample properties’. Journal of econometrics108(1), 1-24.
    12.  Mengesha, L.G., and Holmes, M.J. (2013). Monetary policy and its transmission mechanisms in Eritrea. Journal of Policy Modeling35(5), 766-780.
    13.  Mishkin, F.C.S. (2001), “The Transmission Mechanism and the Role of Asset Prices in Monetary Policy”, NBER Working Paper 8617, 21p.
    14. Matyas, L. and Sevestre P. (1992). The Econometric Analysis of Panel Data, Handbook of Theory and Application, Dordrech, Kluwer Academic Press.
    15. Nyakerario, M. and Nyamongo, S. (2012). ‘Asset Prices and Monetary Policy in Kenya’. Journal of Economic Studies Vol. 39 No. 4, 451-468.
    16.  Ping, X. and Xiaopu, Z. (2003). ‘The coordination between monetary policy and exchange rate policy in an open economy in transition: a case study on China from 1994 to 2000’. Journal of Asian Economics, 14(2), 327-336.
    17.  Rigobon, R. and Sack, B. (2004). ‘The Impact of Monetary Policy on Asset Prices’. Journal of Monetary Economics51(8), 1553-1575.
    18.  Taylor, J.B. (1995). ‘The Monetary Transmission Mechanism: an Empirical Framework’. Journal of Economic Perspectives, Vol. 9, 11-26.
    19.  Vithessonthi, C. (2014). ‘Monetary policy and the first-and second-moment exchange rate change during the global financial crisis: Evidence from Thailand’. Journal of International Financial Markets, Institutions and Money, 29, 170-194.
    20.  Windmeijer, F. (2005). ‘A finite sample correction for the variance of linear efficient two-step GMM estimators’. Journal of econometrics, 126(1), 25-51.