Currency Devaluation: A Case Study of Excessive Money Supply and Exchange Rate Pass-Through (ERPT) Inflationary Effect
กรณีศึกษาปริมาณเงินที่มากเกินไปและผลกระทบของภาวะเงินเฟ้อจากอัตราการส่งผ่านอัตราแลกเปลี่ยน (ERPT)
DOI:
https://doi.org/10.14456/ncrj.2023.3Keywords:
Currency devaluation, ERPT, exchange rate, extreme value theory (EVT), Frechet distribution, inflation, money supply, pass-through, Weibull distributuionAbstract
This is a case study of currency devaluation and inflationary pressure as precursors to economic recession. The purpose of this paper is to explore possible policy tools against currency devaluation and inflationary pressure. We selected Laos as a proxy country to explore the interrelationship between currencies through exchange rates against the US dollar. The weekly spot rates of exchange rates from January 1, 2012 to May 22, 2022. The sample size included 543 weeks of Asian currencies and EUR against US dollars. We employed Weibull distribution as a tool for constructing a times series equation for the individual currency exchange patterns against the US dollar. We found that the long-term equilibrium point for the Lao currency is 8,541 ± 928.46 compared to its last spot rate of 13,240 or devalued by 55%. Among seven currencies commonly traded in Laos, we found that there are 4 currencies that significantly correlated with LAK, namely CNY, SGD, VND, and EUR with T values of 9.06, 10.61. 17.70, and 10.20 or p = 0.000 in all cases and R squared was 0.52. We also found that LAK has a tail index of 5.66 under Extreme Value Theory (EVT) and is Frechet distributed with the shape parameter for LAK is = -0.18; scale = - 130.57; and location = 11,216.32. With the last spot rate at 13,240, LAK faces 18% exchange rate pass-through (ERPT) inflationary pressure.
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