The Economics and Finance Letters

Interest rates, money supply, institutional quality, and exchange rate stability in Nigeria

Olufemi Ademola — 2024-09-27

The purpose of this paper was to examine the intricate relationship between interest rate and exchange rate, exploring their interdependencies, mechanisms, and implications for policy management and economic stability in Nigeria, and to also shed light on the complex dynamics that govern these two fundamental pillars of financial markets, as well as the appropriateness of the continuous use of interest rates to manage the Nigeria’s currency exchange rate. This is because, since the mid-2000s, the Central Bank of Nigeria (CBN) has consistently used interest rate adjustment as a policy tool to manage exchange rate volatility, with mixed outcomes. The study utilised a dataset consisting of 68 quarters of time series data, spanning from 2006Q1 to 2022Q4, and adopted the Autoregressive Distributed Lag (ARDL) model to evaluate the influence of interest rates, money supply growth, and institutional quality on exchange rate stability in Nigeria, employing an ex-post facto research approach. Using the ARDL to test the hypothesis, the study found that monetary policy rate and money supply have long-run insignificant cointegrating relationships with exchange rate in Nigeria (Adj R2=0.642; F-stat (4, 63) = 53.813, p<0.05). The study concluded that interest rates have a significant impact on exchange rates in Nigeria. The study found that the independence of the CBN and adoption of capital mobility, and a fixed exchange rate mechanism in Nigeria are a violation of the principle of “impossible trinity” of fixed exchange rates and recommended a review of the exchange rates management policy.

The impact of institutional environment factors on foreign direct investment in provinces located in the Mekong delta region

Ba Hoang Nguyen — 2024-10-10

The primary aim of this study is to explore the influence of institutional environmental factors on foreign direct investment (FDI) within the provinces of Vietnam's Mekong Delta region over the period from 2010 to 2022. The fixed-effect model (FEM) and random-effect model (REM) are used for estimating the impacts of the institutional environment's elements on the FDI of Vietnam's provinces. The Hausman’s test is applied to help determine a suitable and reliable model to perform analyses and discuss the empirical results. The research results indicate that institutional environment factors have a significant impact on FDI inflows in the provinces. Specifically, enterprise support and the number of FDI projects foster the FDI inflows in the provinces of Mekong Delta region. Furthermore, factors such as cost of market entry, information transparency, informal costs, the dynamics of the leaders at the provincial level, the level of labor training, and legal institutions do not significantly influence the FDI inflows into the provinces. Based on these findings, the main policy implications, including improving enterprise support and increasing the number of FDI projects to attract more FDI inflows to the provinces in the Mekong Delta region of Vietnam, have also been proposed.

Analyzing the liquidity of commercial banks in India: Study on different bankgroups

Ekta Kasana — 2024-10-10

The present study investigates how macroeconomic and bank-specific determinants affect the liquidity of public, private, and foreign banks in India. Bank liquidity is crucial for maintaining financial stability, supporting economic growth, and preserving public trust in the banking system. Bank liquidity is critically significant for bank success. Since 2008, this study has taken 49 banks for analysis purposes. We have employed the fixed and random effect models to examine the impact of bank-specific and macroeconomic variables on the liquidity of diverse bank groups. The results show that deposits and capital have a positive influence, whereas interest rate, statutory liquidity ratio, and cash reserve ratio negatively influence public, private, and foreign banks. Profitability has an insignificant effect on all types of banks. Gross domestic product has a positive, significant influence on public and private banks, but an insignificant impact on foreign banks. Bank size significantly impacts private banks, whereas it has negligible influence on other banks. The findings can assist bank managers, policymakers, and academics in formulating policies that maintain bank liquidity without incurring any losses or undefined costs. The present research is useful for other countries with a similar economic framework, like India, to improve their bank liquidity structure.

The research on the impact of short-term cross-border capital flows on stock market prices in China

Yuantao Fang — 2024-10-10

This paper examines the long-term dynamic impact of short-term cross-border capital flows on the Shanghai Composite Index and the CSI 300 Index using monthly data from 2010 to 2020 and a Vector Autoregression (VAR) model. With the financial opening and the internationalization of the renminbi in China, the stock market has gradually liberalized its management of foreign capital. As a result, the A-share market has become a target for passive capital inflows from overseas investors. This has further intensified the volatility of asset prices and posed challenges to China's cross-border capital regulation. According to the study, short-term cross-border capital flows have a negligible impact. However, a positive correlation appears between 4 to 9 months, followed by a significant negative impact in the 10th month, reflecting the oscillatory risks that cross-border capital flows pose to China's stock prices. This finding reflects how Chinese capital controls have limited the short-term negative impact of cross-border capital flight on stock prices. The paper recommends strengthening the regulation of short-term cross-border capital, cautiously advancing the financial opening system, and actively improving the stock market system.

Asymmetric impact of climate change on banking system stability in selected sub-Saharan economies

Emmanuel Amo-Bediako — 2024-10-25

This study is an empirical examination of the asymmetric impact of climate change on banking system stability in selected sub-Saharan economies. The study leverages a quantitative research approach through a panel non-linear ARDL framework and data from 29 selected economies, which spans 1996-2017. Findings from the study reveal that in the long term, partial sums of temperature have an insignificant relationship with banking system stability. Further, partial sums of precipitation are negatively related to banking system stability in the long term. The finding indicates that both positive and negative precipitation do harm banking system stability in the selected sub-Saharan economies. Moreover, we find that partial sums of greenhouse gas emissions had an insignificant relationship with banking system stability. In addition, we conclude that greenhouse gases (positive and negative) do not impair banking system stability in selected sub-Saharan economies in the long term. We surmise from the findings that both positive and negative climate change indexes are harmful to banking system stability. On the short-term asymmetric impact, we discover that partial sums of temperature, precipitation, and climate change index do not harm banking system stability. However, negative greenhouse gas emissions are pernicious to the banking system’s stability in the short term. Conversely, positive greenhouse gas levels were statistically insignificant. The study recommends that central banks and monetary authorities in Sub-Saharan Africa design green banking policies to push the climate change agenda in the banking sector.