Author(s): Alimaa Batai, Amanda M.Y. Chu, Zhihui Lv, Wing-Keung Wong
This paper studies the factors that maintain a long-run equilibrium, short-run impact and causality with the exchange rate of Mongolia over China to shed light on exchange rate determination. Our cointegration analysis shows that in the long run the gross domestic products (GDP) of China and the index of world price have significantly positive effects while Mongolia’s GDP and the Shanghai stock index have significantly negative effects on Mongolian exchange rate. We reveal existence of the short run dynamic interaction and strongly significant multivariate linear and nonlinear causality from all the explanatory variables to Mongolian exchange rate. In addition, we observe that there is strong linear causality from each of GDPs of Mongolia and China and the index of world price to Mongolian exchange rate, but not from the index of world price. Moreover, there is strongly significant nonlinear causality from the Shanghai stock index to Mongolian exchange rate and weakly significant nonlinear causalities from both GDP of China and the index of world price to Mongolian exchange rate but not from Mongolia’s GDP. Our findings are useful to investors, manufacturers and traders for their investment decision making and policy makers for their decisions on both monetary and fiscal policies that could affect Mongolian exchange rate.