Exchange Rates, Gold and Money Demand in India and South Africa

This dissertation endeavors to explore the different aspects of macroeconomic factors such as the exchange rate, price of gold and demand function for money in India and South Africa respectively. In the second chapter, we investigate the co-movements and relationships among gold and oil prices and Indian Rupee (INR) to US Dollar (USD) exchange rate over the period of January 12, 2004 to April 30, 2015, to consider whether economic policymakers in India should separate financial policies and energy policies. We use different econometric methods such as Johansen’s cointegration test, vector autoregressive (VAR) model, Granger-causality test and impulse response to describe the relationships among the factors. Our empirical results show that in spite of short-run causality effects between the variables, there is not a long-run relationship between them. This analysis provides a number of important economic insight into these markets in India. The third chapter is an empirical exercise in money demand behavior, testing whether economic and monetary uncertainties may affect the demand function for money in South Africa. This is often done by utilizing the unlimited error-correction model and bounds testing method to cointegration explained by Pesaran et al. (2001). We employ the moving-average standard deviation method to generate the results uncertainty estimation and monetary uncertainty estimation. The results suggest that any increase in output uncertainty causes a substitution effect away from cash and less volatile assets, whereas an increase in monetary uncertainty causes a precautionary impact to save more volatile assets i.e. cash. Finally, we use Brown et al.’s (1975) cumulative sum (CUSUM) and cumulative sum of squares (CUSUMSQ) tests to consider the coefficients strength. Our findings report the steady demand function for money in South Africa. In the fourth chapter, we check the impact of domestic and foreign interest rate volatility on the demand function for money in South Africa. Our findings show that the measure of interest rate volatility on domestic money has a negative relationship with the demand for money. This could induce a few investors to move a portion of their wealth out of ostensible resources, including money, into substantial resources such as product inventories. Moreover, the foreign interest rate fluctuation measure is not significantly related to the demand function for money in South Africa. The findings imply that monetary and financial policies have an important role in explaining the economy of less developed countries. Keywords: Exchange rate, gold price, oil price, money demand, India, South Africa.