704850641773A CASE OF AFGHANISTAN FOCUSED ON USD

00A CASE OF AFGHANISTAN FOCUSED ON USD

IMPACT OF MACRO ECONOMIC VARIABLES ON FOREIGN EXCHANGE RATE

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By:

Amanullah EnayatA project report submitted to the Department of Accounting & Finance, Faculty of Management Sciences, Kardan University, Kabul in partial fulfillment of the requirements for the degree of

BACHELOR OF BUSINESS ADMINSTRATION

(FINANCE)

Faculty of Management Sciences

Department of Accounting and Finance

KARDAN UNIVERSITY KABUL

November, 2016

704850651510A CASE OF AFGHANISTAN FOCUSED ON USD

00A CASE OF AFGHANISTAN FOCUSED ON USD

IMPACT OF MACRO ECONOMIC VARIABLES ON FOREIGN EXCHANGE RATE

center155659700

Submitted by:

Amanullah Enayat (Reg. Number 302-1209103)

BACHELOR OF BUSINESS ADMINISTRATION

(FINANCE)

Submitted to:

Usman Ali Khan, Assistant Professor

Faculty of Management Sciences

Department of Accounting and Finance

KARDAN UNIVERSITY KABUL

November, 2016

Copyright© 2016 by Amanullah EnayatAll rights are reserved. No part of this project report can be reproduced in any form or any means such as photocopy or electronic media etc. without prior approval of the author.

PROJECT APPROVAL FORM

This is certified that Mr. Amanullah Enayat student of Kardan University, Kabul (Registration Number. 302-1209103) have completed his project report entitled “Impact of Macro Economic Variables on Foreign Exchange Rate” under my supervision . I have checked this report and satisfied with overall performance and recommend the report to the Faculty of Management Sciences, Department of Accounting and Finance, Kardan University for acceptance.

Usman Ali Khan

SUPERVISOR

Assistant Professor

Faculty of Management Sciences

Kardan University, Kabul

34036007620

Mr. Murtaza Massod Niazi

HEAD OF DEPARTMENT

Faculty of Management Sciences

Kardan University, Kabul

Dr. Syed Umar Farooq

VICE CHANCELLOR

Academics

Kardan University, Kabul

DECLARATION FORM

I Amanullah son of Hayatullah Registration # 302-1209103 Student of Bachelor of Business Administration at the Kardan University Kabul, Afghanistan do hereby declare that the Project Report titled as;

Impact of Macro Economic Variables on Foreign Exchange Rate

Submitted by me in partial fulfilment of BBA (Hons.) degree, is my own work, and has not been submitted or published earlier. I also solemnly declare that it shall not, in future, be submitted by me for obtaining any other degree from this or any other university or Institution.

Amanullah EnayatStudent (Reg. Number 302-1209103)

Department of Accounting and Finance

Faculty of Management Sciences

Kardan University, Kabul

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DEDICATION

Dedicated to my parents who gave me life and raised me to the person I am today. I owe them each moment of my life and praise them in every breath.

A C K N O W L E D G E M E N T

All praises to Allah almighty who has blessed me with knowledge to accomplish the task of completing this thesis.

I wish to express my sincere gratitude and appreciation to all those who in one way or another contributed to the success of preparation of this research project. I would like to acknowledge the inspirational instruction and guidance from my supervisor Usman Ali Khan who guided me throughout the research project.

Finally, thanks to my family especially my father and my mother. They always supported and encouraged me from the start of my studies from school up to now and friends for all the support and understanding during period of writing my bachelor thesis.

Amanullah EnayatTable of Contents

TOC o “1-4” h z u 1.1Background of The Study: PAGEREF _Toc468345947 h 101.1.1Exchange Rate in Afghanistan PAGEREF _Toc468345948 h 21.1.2Relationship among selected Macroeconomic Variables & Forex Globally PAGEREF _Toc468345949 h 21.1.2.1Influence of Inflation on Foreign Exchange Rate Globally: PAGEREF _Toc468345950 h 21.1.2.2Influence of Interest rate on Foreign Exchange Rate Globally: PAGEREF _Toc468345951 h 21.1.2.3Influence of imports and exports on Foreign Exchange Rate Globally: PAGEREF _Toc468345952 h 32 PAGEREF _Toc468345953 h 31.2Research Problem: PAGEREF _Toc468345954 h 31.3Research Objective: PAGEREF _Toc468345955 h 31.4Hypotheses: PAGEREF _Toc468345956 h 31.5Significance of the Study: PAGEREF _Toc468345957 h 31.6Limitation: PAGEREF _Toc468345958 h 42.1Introduction: PAGEREF _Toc468345961 h 42.2Theoretical Review: PAGEREF _Toc468345962 h 42.1 PAGEREF _Toc468345963 h 42.2 PAGEREF _Toc468345964 h 42.2.1Purchasing Power Parity (PPP) Theory PAGEREF _Toc468345965 h 42.2.2Interest Rate Parity (IRP) Theory PAGEREF _Toc468345966 h 52.2.3Balance of Payment Theory of Exchange Rate PAGEREF _Toc468345967 h 52.3Empirical Review of Existing Studies PAGEREF _Toc468345968 h 62.4Summary of the Literature Review PAGEREF _Toc468345969 h 103.1Introduction PAGEREF _Toc468345971 h 113.2Research Design or Methodology PAGEREF _Toc468345972 h 113.3Research Type PAGEREF _Toc468345973 h 123.4Population Procedures PAGEREF _Toc468345974 h 123.5Data Collection Methods PAGEREF _Toc468345975 h 123.6Explanation of the Selected Macro-Economic Variables PAGEREF _Toc468345976 h 123 PAGEREF _Toc468345977 h 122.1 PAGEREF _Toc468345978 h 122.2 PAGEREF _Toc468345979 h 122.3 PAGEREF _Toc468345980 h 122.4 PAGEREF _Toc468345981 h 122.5 PAGEREF _Toc468345982 h 122.6 PAGEREF _Toc468345983 h 123.6.1Interest Rate PAGEREF _Toc468345984 h 123.6.1.1Simple Interest Rate PAGEREF _Toc468345985 h 123.6.1.2Compound Interest Rate PAGEREF _Toc468345986 h 123.6.1.3Nominal Interest Rate PAGEREF _Toc468345987 h 133.6.1.4Discount Rate PAGEREF _Toc468345988 h 133.6.1.5Real interest Rate PAGEREF _Toc468345989 h 133.6.2Inflation Rate PAGEREF _Toc468345990 h 133.6.3Imports PAGEREF _Toc468345991 h 133.6.4Exports PAGEREF _Toc468345992 h 133.7Techniques & Approaches PAGEREF _Toc468345993 h 133.8Regression Model PAGEREF _Toc468345994 h 144.1Introduction PAGEREF _Toc468345996 h 154.2Applied Tests PAGEREF _Toc468345997 h 154 PAGEREF _Toc468345998 h 152.1 PAGEREF _Toc468345999 h 152.2 PAGEREF _Toc468346000 h 154.2.1Unit Root Test (Augmented Dickey Fuller Test) PAGEREF _Toc468346001 h 154.2.1.1Augmented Dickey Fuller (ADF) Test for Foreign Exchange PAGEREF _Toc468346002 h 164.2.1.2Augmented Dickey Fuller (ADF) Test for Interest PAGEREF _Toc468346003 h 164.2.1.3Augmented Dickey Fuller (ADF) Test for Inflation PAGEREF _Toc468346004 h 174.2.1.4Augmented Dickey Fuller (ADF) Test for Imports PAGEREF _Toc468346005 h 174.2.1.5Augmented Dickey Fuller (ADF) Test for Exports PAGEREF _Toc468346006 h 184.3Lag Value: PAGEREF _Toc468346007 h 184.4Johnson Co-Integration Test: PAGEREF _Toc468346008 h 194.5Vector Correction Error Estimation: PAGEREF _Toc468346009 h 214.1 PAGEREF _Toc468346014 h 224.2 PAGEREF _Toc468346015 h 224.3 PAGEREF _Toc468346016 h 224.4 PAGEREF _Toc468346017 h 224.5 PAGEREF _Toc468346018 h 224.6Summary and Interpretation of Findings PAGEREF _Toc468346019 h 225.1introduction PAGEREF _Toc468346021 h 235.2Summary PAGEREF _Toc468346022 h 235.3Findings & Conclusion PAGEREF _Toc468346023 h 235.4Recommendations PAGEREF _Toc468346024 h 245.5Suggestions PAGEREF _Toc468346025 h 245.6Appendix PAGEREF _Toc468346026 h 24

Executive Summary

The macroeconomic variables changes over the time and they affect the exchange rate in both the positive and negative manner. This study has been conducted to determine whether that uncertainty or fluctuation in the macroeconomic variables in Afghanistan affect foreign exchange rate or not. In our project we analyzed the impact of macroeconomic variables on Exchange Rate. The macroeconomic variables which we used are terms of trade, inflation, interest and terms of balance.

Ordinary least square technique has been used to determine the relationship between dependent and independent variable. The result shows that Imports and exports have negative impact on exchange rate.Chapter one

INTRODUCTION

Background of The Study:Exchange rate between two monetary forms is that rate at which one currency will be traded with another currency. It is otherwise called a foreign-exchange rate, forex rate.

The spot exchange rate is the current exchange rate. The forward exchange rate is that exchange rate which is quoted today but delivery and payment settlement will be held on a specific future date. A market-based exchange rate will change whenever the values of either of the two component currencies change. A currency tends to become more valuable whenever demand for it is greater than the available supply.

Demand for a currency comes from net export while supply of the currency comes from net foreign investment. Any change in demand for and supply of currency effect its value just like a good market that is if demand for a currency increases its value (exchange rate) will be increased while increase in supply of the currency will reduce its value (exchange rate) in the foreign exchange market.

Before World War I the values of the world’s major currencies were fixed in terms of gold, while for a generation after World War II the values of most currencies were fixed in terms of the U.S. dollar.

Forex plays a critical part in worldwide trade for an economy. This is because fluctuation in exchange rate affects the profitability of multinational and enlarges trade exposure to ventures and money related organizations, instability in the exchange rate may significantly affect macroeconomics essentials, like, interest rate, inflation, imports, and exports. Macroeconomic variables are very necessary and obligatory for general execution of an economy and it is vital to figure exchange rate unpredictability.

Exchange Rate in Afghanistanbased on Article 69 of the Da Afghanistan Bank law, planning, adopting and execution of exchange rate strategy is one of the primary duties of Da Afghanistan Bank (DAB). Among the eight exchange rate regimes administrations on the world, Da Afghanistan Bank adopted the Managed Floating Exchange Rate regime that under this structure, the Forex rates are controlled by market forces and depend on demand and supply of these currencies. If supply exceeds the demand, the value of the currency depreciates. This regime is adopted in light of the economic condition, balance of payments (exports and imports), and considering the level of openness of the economy (currency inflow and outflow). Under this system, DAB does not focus on the forex. Meanwhile considering the negative effects of the forex fluctuation on the investors, consumers, and other economic agent’s expectations as well as the level of overall domestic prices, DAB screens the exchange rate behavior and puts its efforts to prevent serious fluctuation in the exchange rate.

Relationship among selected Macroeconomic Variables & Forex GloballyInfluence of Inflation on Foreign Exchange Rate Globally:As a general rule a nation with a consistently lower inflation rate shows a rising currency value, as its purchasing power builds in respect to different monetary standards or currencies. During the last half of the 20th century, the nations with low inflation included Japan, Germany and Switzerland, U.S. also, Canada accomplished low inflation just later. Those nations with higher inflation regularly observe devaluation in their money in compare to the currency of their trading partners.

Influence of Interest rate on Foreign Exchange Rate Globally:Jason Van Bergen (2016) “interest rates, inflation and exchange rates are all exceedingly related. By controlling interest rates, national banks apply impact over both inflation and exchange rates, and changing interest rates impact inflation and currency values, higher interest rates offer lenders in an economy a higher return in respect to different nations. In this way, higher interest rates attract foreign capital and cause the exchange rate to rise”.

Influence of imports and exports on Foreign Exchange Rate Globally:the price of a country’s exports rises by a greater rate than that of its imports, its terms of trade have favorably improved. Increasing terms of trade shows greater demand for the country’s exports. This, in turn, results in rising revenues from exports, which provides increased demand for the country’s currency (and an increase in the currency’s value). If the price of exports rises by a smaller rate than that of its imports, the currency’s value will decrease in relation to its trading partners.

Research Problem:

Researcher explore the relationship between macro-economic variables and exchange rate fluctuations in response to these variables researcher finds out which macro-economic variables are more closely correlated with exchange rate fluctuations. Theoretically there are preplanned relationship between macro-economic variables and exchange rate fluctuations. In this paper researcher find out whether these relationships hold true in practical sense or not in Afghanistan context.

Research Objective:

To explore impacts of macro-economic variables on exchange rate of Afghanistan and;

To find out which macro-economic variable have the most impact on exchange rate of Afghanistan.

Hypotheses:H1: High inflation leads to depreciation of exchange rate of a currency.

H2: High interest rate results in depreciation in the Exchange rate of currency.

H3: Exchange rate has positive correlation with imports.

H4: Exchange rate has negative correlation with exports.

Significance of the Study:

This study is of significance to both current and potential Afghan and foreign investors because they can learn how macro-economic variables influence exchange rate, hence they would consider the macro-economic variables in their investment decision.

Limitation:

In any data collection, incomplete and inaccurate information is a serious problem. Administrative data in Afghanistan is not spared from this.

The collected data from Da Afghanistan Bank (DAB), Central statistics organization of Afghanistan, ministry of trade and other related organizations was incomplete and that is the reason that this research that was intended to cover years 2002-2015 is not conducted and the researcher have covered years 2007-2015.

CHAPTER TWO

Literature Review

Introduction:The point of this chapter is to recognize the arrangement of variables that may conceivably go about as determinants of the real exchange. The part is separated into three areas. The primary area covers hypothetical writing or theoretical literature on the determination of the real exchange rate, while the second segment covers experimental discoveries on this subject. The last section finishes up with the summary of the observational or empirical writing of previous researchers and authors.

Theoretical Review:There are three critical theories that appropriately clarify fluctuations in Forex rates.

Purchasing Power Parity (P.P.P) Theory

Interest Rate Parity (IRP) Theory

BOP Theory of Exchange Rate

Theories have been discussed beneath.

Purchasing Power Parity (PPP) TheoryPurchasing power parity is used worldwide to compare the income levels in different countries. PPP thus makes it easy to understand and interpret the data of each country. The theory aims to determine the adjustments needed to be made in the exchange rates of two currencies to make them at par with the purchasing power of each other. In other words, the expenditure on a similar commodity must be same in both currencies when accounted for exchange rate. The purchasing power of each currency is determined in the process.

Interest Rate Parity (IRP) Theory

Interest rate parity (IRP) theory stating that the difference between interest rates in two countries is the difference between the foreign exchange rate and the spot rate of their two currencies. According to this theory, when one makes two fixed investments in two different currencies, the return on both investments are the same even though interest rates may be different in absolute terms.

Balance of Payment Theory of Exchange Rate

The balance of payments theory of exchange rate holds that the price of foreign money in terms of domestic money is determined by the free forces of demand and supply on the foreign exchange market. It follows that the external value of a country’s currency will depend upon the demand for and supply of the currency. The theory states that the forces of demand and supply are determined by various items in the balance of payments of a country. According to the theory, a deficit in the balance of payments leads to fall or depreciation in the rate of exchange, while a surplus in the balance of payments strengthens the foreign exchange reserves, causing an appreciation in the price of home currency in terms of foreign currency. A deficit balance of payments of a country implies that demand for foreign exchange is exceeding its supply.

As a result, the price of foreign money in terms of domestic currency must rise, i.e., the exchange rate of domestic currency must fall. On the other hand, a surplus in the balance of payments of the country implies a greater demand for home currency in a foreign country than the available supply. As a result, the price of home currency in terms of foreign money rises, i.e., the rate of exchange improves.

In short, the balance of payments theory simply holds that the exchange rates are determined by the balance of payments connoting demand and supply positions of foreign exchange in the country concerned. As such, the theory is also designated as “Demand-Supply Theory.”

The theory asserts that, the rate of exchange is the function of the supply of and demand for foreign money and not exclusively the function of prices obtaining between two countries as asserted by the Purchasing Power Parity Theory which does not take into account invisible items.

According to the balance of payments theory, the demand for foreign exchange arises from the “debit” items in the balance of payments, whereas, the supply of foreign exchange arises from the “credit” items. Since the theory assumes that the demand for and supply of foreign currency are determined by the position of the balance of payments, it implies that supply and demand are determined mainly by factors that are independent of variations in the rate of exchange or the monetary policy.

Empirical Review of Existing StudiesAsseery and Peel (1991) examine the reactions of exports volume to wage, relative costs, and unpredictability utilizing the information of Japan, West Germany, the United States, the United Kingdom (UK), and Australia over the period 1972–87. The creators have stressed the significance of stationarity issue of the variables and demonstrated the absence of decisive results got in numerous past studies. The authors arrive conclusion that conversion scale variability positively affects exports volumes.

Alam, M. Z. (2012) found a negative effect of real exchange rate instability on imports in Pakistan for the long run.

Bahmani-Oskooee, M., & Satawatananon, K. (2012), and Jiranyakul, K. (2013) demonstrated a negative effect of foreign exchange rate vulnerability on Thailand’s imports.

Benita, G., ; Lauterbach, B. (2007) Said That macro-economic variables influence the day by day unpredictability of the conversion rate against the U.S. Dollar. Breaking down a global board of 43 currencies in 1990-2001 he found that the flexibility of the exchange rate regime and administration, national bank’s intercession and the uncertainty of the domestic economy increase exchange rate unpredictability, while the nation’s economic wealth decreases instability. Limitations on capital flow don’t influence exchange rate instability.

Bhatti (1997) utilized month to month information from 1982:1 to 1993:7 to examine the Purchasing Power Parity (PPP) in Pakistan and discovered backing for a proficient business sector i.e. the Purchasing Power Parity holds well and exchange rates takes after an irregular stroll in Pakistan. He further reasoned that the conversion rate of Pak Rupee against currencies of modern nations is dictated by the distinctions in the level of inflation, income and interest.

Binder, M., & Offermanns, C. (2007) reported that conversion scale forecasting is to connect exchange rate movements in certain key macroeconomic as money, income, prices and interest rate.

Bleanty et.al (1999) reported through the model that if conversion scale of creating nations pegged to the developed nations the inflation pressure might be reduced.

Conway (1998) comes to on conclusion that if there is any adjustment in conversion scale it acquires fast change the rate of inflation. Due to unsettling influences in the conversion scale the inflation level is additionally negatively influenced. It was additionally reported that foreign exchange inconstancy affects cause’s higher inflation.

Conway, Drew, Ben haunt and Alasdair (1998) settled that unpredictability in exchange rates causes more changes in inflation rate. In 43 nations examining a worldwide board in 1990-2001 reasoned that the adaptability in conversion scale mediation of national bank and the hazard of the local economy increase exchange rate fluctuation. Limitations on the capital streams don’t influence conversion scale fluctuation.

Coudert and Dubert (2005) give a record that development of real Asian nations and inflation relies on exchange rate administrations and regimes.

Doganlar (2002) finds that exchange-rate risk discourages the exports of Turkey, South Korea, Malaysia, Indonesia, and Pakistan.

Ethier (1973), Cushman (1983,1986), Kenen and Rodrik (1986), Peree and Steinherr (1989), Caporale and Doroodian (1994), Arize (1998), and Coric and Pugh (2010), demonstrated that increased foreign exchange rate have negative consequences for global trade, particularly exports.

Hajhouj (2000) have concluded that when exchange rate fluctuations rise, firms shift investment from the foreign markets to domestic markets. He also noted that when prices and wages move in the same direction, international firms are enhanced to increase its capital.

Hall et al. (2010) Recently, utilizing panel data estimation method, attempted to a survey the impact of conversion rate unpredictability on exports by utilizing the information of ten developing business sector economies and eleven other developing nations. The creators find that unpredictability has been measurably huge and negative, suggesting an unfavorable impact of exchange rate instability on exports for the gathering of developing nations.

Hooper and Kohlhagen (1978) researched the impacts of foreign exchange rate instability on imports of five industrialized nations and found that foreign exchange rate instability measured by the standard error of nominal exchange rate positively impacts imports.

Jakab Milhey (1999) reported that nominal inflexibility doesn’t assume a significant part in tradeable real exchange rate fluctuations, exchange rage arrangement or policy stuns were not the main sources of real exchange rate variance.

Kara, A., Nelson, E. (2002) reported that connection between CPI inflation and exchange rate changes was little.

Lahari ; Trovask (2008), have concluded that conversion scale variance or fluctuations and changes in inflation are interrelated. They added that relationship between conversion scale fluctuation and changes in interest rate is a positive relationship, they facilitate finished up a non-monotonic relationship between changes in level of interest rate and changes in interest rate.

Lauterbach and Banita (2007) stated that day by day varieties in conversion rate against the U.S. $ are influenced through macroeconomic variables. They state that the exchange rate fluctuations increase through versatility of the exchange-rate, interference by the national bank and lack of certainty of the domestic economies, then again exchange rate variation does not impact through the restrictions on the flow of capital and the economic wealth of nation declines unpredictability.

Obstfield ; Rogoff (2005), Kendal (2004) concluded a considerable relationship between exchange rates fluctuation and current account balance.

Olimor and Sirajiddinov (2008) in their examination recognized an opposite relationship between unpredictability of conversion rate in Uzbekistan on both the trade outflows and inflows. In this way it is more striking for foreign investors to make their investment in the host country and many more. They get hold of benefits of foreign country which are less expensive in remote nation other than home nation.

Omerbegovic, A. (2005) has find that the appropriateness of the exchange rate is determined by the criteria whether the current level of the exchange rate that is associated with the equilibrium situation, which is defined in terms of goods and labor market equilibrium and the external balance being sustainable, which on the other hand is determined by the condition of the real economic variables found in equilibrium. Hence, a proper understanding the determinants of exchange rate helps the policy-makers to design appropriate exchange rate policy in achieving the long-run sustainability of the balance of payments.

Razak, A. W., Simon. D. N. (1999) roll out his depiction that improvements in interest rate and conversion rate changes has positive relationship.

Rehman, M., ; Zaman, A. (2010) reported that inflation is stronger macroeconomics variable that is the motivation and reason to depreciation and appreciation in exchange rate of local currency, that is the reason inflation is critical variable for Conversion rate.

Rehman, Rauf and Rehman (2010) utilized month to month information from 1994 to 2004 to investigate the effect of interest Rate and inflation on Exchange Rate. As indicated by them the relationship among interest rate and exchange rate of Pak Rupee with British pound is altogether positive and relationship of inflation with exchange rate is negative and critical.

Sadeghi, Samson ; Sherafat (2007) concluded that a one percent increase in exchange rate causes 10 percent increase in inflation rate.

Saleem, I. (2012) investigated the relationship between macroeconomic variables and conversion rate through regression technique. The variables he utilized as a part of his project are tare terms of trade, relative interest rate, relative inflation rate and balance of trade. The outcomes demonstrate the presence of positive impact of terms of trade, relative interest rate and balance of trade and negative impact of relative inflation rate on conversion rate.

Serenis, D. (2013) lately demonstrated that an unfavorable relationship can be found amongst exports and foreign exchange unpredictability for South American countries.

Vergil (2003) analyzed the relationship among conversion rate and macro-economic variables inside Turkey and the European Union by method for quarterly information from 1990:1 to 2000:12. The after effects of Vergil’s study exhibit that Real exports in Turkey are firmly influenced. through conversion scale instability. The finding proposes that the connection of real exports and exchange rate has essentially negative.

West, K. D. (2003) reported that exchange rate fluctuation is useful in future economic variables such as money, income, prices and interest rates, he also added that exchange rates can help to forecast major macroeconomic indicators.

Summary of the Literature ReviewThe main objective of this chapter has been to investigate the potential determinants of the real exchange rate. There are several theoretical models of the determination of the real exchange rate, let alone of its measurement, but the so-called fundamentals models have emerged as the most popular in empirical analysis on this subject. These models combine several other models to come up with potential fundamental determinants of real exchange rates. In other words, they provide a unified dynamic framework for analyzing the behavior of the real exchange rate.

Previous researchers have empirically estimated these fundamentals models, but only selecting variables that suit their different situations

Empirical findings suggest that selected macro-economic variables (inflation, Interest rate, Imports and Exports) effecting exchange rate, either in a positive or negative manner.

chapter three

research methodology

IntroductionThis chapter sets out different stages and stages that were followed in finishing the study. It included an outline for the gathering, estimation and Analysis of data. In this stage, most choices about how research was executed and how respondents were drawn closer, and in addition when, where and how the examination or research was finished. Consequently, in this area the research recognized the systems and methods that were utilized as a part of the gathering, preparing and investigation of information or data. In particular, the accompanying subsections were incorporated; research design, data accumulation instruments, data gathering techniques lastly data analysis.

Research Design or MethodologyResearch design is a plan that specifies how data from the study was collected and analyzed. For this study Quantitative research is used particularly based on the measurement of quantity or amount. It is applicable to phenomena that can be expressed in terms of quantity.

Researcher used Quantitative research because it tests and validates already constructed theories about how and why phenomena occur, it tests hypotheses that are constructed before the data are collected and it can generalize research findings when the data are based on random samples of sufficient size. It also provides precise, quantitative, numerical data, Data analysis is relatively less time consuming (using statistical EViews software) and it have higher credibility and is useful for studying large numbers of population.

Research TypeThis is Exploratory, cause and effect research design because it does not intend to give the last and final responses to the research questions but it explores the research topic with varying levels of depth and it’s the underlying and initial research which forms the basis for more conclusive research. A cause-effect relationship is a relationship in which one occasion (the cause which is macroeconomic variables) makes another occasion happen (the impact which is Forex). One cause can have a several impacts.

Population ProceduresThis is a total population sampling procedure which the researcher chooses to examine the entire population (Afghanistan).

Data Collection MethodsIn this research, secondary data from year (2007-2015) was collected from sources such as Da Afghanistan Bank (DAB), Afghanistan Central Statistics Organization, Ministry of Commerce and Industries, World Trade Organization, World Bank.

Explanation of the Selected Macro-Economic VariablesThe four selected variables for this case (Interest Rate, Inflation, Imports ; Exports) are listed and explained separately below:

Interest Rate

Interest rate is the rate which is charged by lenders in compensation for the loss of the asset. because the lender could have invested the funds instead of lending them out. Following are types of interest rate.

Simple Interest RateSimple interest rate is a fast strategy for computing the interest charge on a loan. Simple interest is determined by multiplying the interest rate by the principal by the quantity of days that slip by between installments.

Compound Interest RateCompound interest is interest calculated on the initial principal and also on the accumulated interest of previous periods of a deposit or loan. Compound interest can be considered as “interest on interest” and will make a deposit or loan grow at a speedier rate than simple interest, which is interest calculated only on the principal amount.

Nominal Interest RateNominal interest rate is the rate of interest before taking inflation into consideration. To acquire nominal interest rate, inflation and risk premium additionally added to the real interest rate.

Nominal interest rate = Real interest rate + Risk premium + Inflation Premium

Discount RateDiscount rate is utilized to find the present value of an expected cash flow which is going to happen later on.

Real interest RateThe genuine interest rate is the rate of interest an investor, saver or moneylender gets (or hopes to get) after taking inflation into consideration.

Inflation RateInflation is characterized as a supported increment in the general level of prices for products and services. It is measured as a yearly percentage increment. The value of a currency does not remain consistent when there is inflation. The value of a currency is observed in terms of purchasing power, which is the genuine, substantial products that cash can purchase. At the point when inflation goes up, there is a decrease in the purchasing power of currency.

ImportsAn import is a good or service brought into one nation from another. “Import” is gotten from “port,” since merchandise are regularly shipped by means of watercraft to outside nations. Alongside exports, imports shape the foundation of global exchange; the higher the value of imports entering a nation, contrasted with the value of exports, the more negative that nation’s balance of trade becomes.

ExportsAn Exports is an element of worldwide trade whereby products created in one nation are dispatched to another nation for future deal or exchange. The sale of such products adds to the delivering country’s gross profit.

Techniques ; Approaches

Time series data for any stationary is checked using Augmented Dicky Fuller.

Lag Test is applied.

Co-integration is applied by using Johansen (1988,1995) test of co-integration.

Vector Error Correction Model (VECM) is used for verifying long term and short term relationship between Forex and macro-economic indicators.

EViews (Econometric Views) Version 9 statistical software is used mainly for time-series oriented econometric analysis.

Regression ModelThe four predictors in the model were; imports and exports, inflation rates, and interest rates. The study used USD since it is the major currency in trade globally. The US Dollar ($) was highly favored due to its stability against other world major currencies.

Data which is monthly USD/AFN exchange rates, interest rates over the years, along with monthly inflation rates, import and export figures are collected from the Da Afghanistan Bank (DAB), Afghanistan Central Statistics Organization (CSO), Ministry of Commerce and Industries, World Trade Organization and World Bank.

A multivariate regression model was applied to determine the relative importance of each of the variables with respect to exchange rate in Afghanistan.

The regression model used was as follows:

Y = ?0+?1X1 +?2X2 +?3X3 +?4X4+e

Where:

Y = Exchange rates

?0 = Constant term

X1 = Average Annual Interest Rate

X2 = Average Annual Inflation Rate

X3 = Annual Imports

X4 = Annual Exports

e = error term

chapter four

DATA ANALYSIS

IntroductionThis chapter presents examination, Analysis and discoveries of the study as set out in the research objective and research methodology. The study findings are exhibited on the variables that decide trade rates in Afghanistan and how those elements impact the trade rates. The information was accumulated solely from the secondary source.

Applied TestsWith a specific end goal to examine relationship of major macroeconomic variables and Foreign Exchange Rate of Afghanistan we applied three underneath said tests:

First the Augmented Dicky Fuller Test (Dicky ; Fuller, 1979) is used to find stationary for selected the data.

Secondly Co-integration between dependent and independent variables is applied by using Johansen (1988,1995) test of co-integration.

Thirdly in order to verify long term or short term relationship between FOREX and macro indicators Vector Error Correction Model (VECM) is used. (Sims 1980).

Unit Root Test (Augmented Dickey Fuller Test)In order to investigate relationship of major macroeconomic variables and foreign exchange of Afghanistan it’s important that first to check weather data that was consider for Foreign exchange is having stationary or not.

A common assumption of time series data is verifying weather data is Stationarity or not. A Stationarity data is that type of data whose mean, variance and autocorrelation structure don’t change over time. Stationarity can be defined in precise mathematical terms, but for our purpose we mean a flat looking series, without trend, constant variance over time, a constant autocorrelation structure over time and no periodic fluctuations (seasonality).

For testing the unit roots of the series the general form of Dickey Fuller regression is formed as below:

?yt= ?yt-1+ i=1m?i?yt-1+?+ ?t+?ty is the first difference of the series, m is the lag length, t is a time trend, ?t is a white noise error term. Null hypothesis for Augmented Dickey Fuller test is as H0: ?2 = ?3 = 0, one thing should be kept in mind while selecting the lag length that the lag length should of appropriate size that it should be relatively small to save degree of freedom and to be large enough to avoid the possibility of autocorrelation in the residual term.

Augmented Dickey Fuller (ADF) Test for FOREXTable 01: Unit Root Test for Foreign Exchange Level 1

Null Hypothesis: D(FOREX) has a unit root

Exogenous: Constant Lag Length: 0 (Automatic – based on SIC, max lag=9)

t-Statistic Prob.*

Augmented Dickey-Fuller test statistic -7.342323 0.0000

Test critical values: 1% level -3.646342 5% level -2.954021 10% level -2.615817 *MacKinnon (1996) one-sided p-values. As above results show value of trace statistic and critical value at 1%, 5%, 10%. The value of absolute trace statistic should be greater than absolute value of critical value at 1% so in above table trace statistic is -7.34 which is greater than -3.64. So we can say that is stationary at (1) level.

Augmented Dickey Fuller (ADF) Test for INTERESTTable 02: Unit Root Test for Interest Level 1

Null Hypothesis: D(INTEREST) has a unit root

Exogenous: Constant Lag Length: 0 (Automatic – based on SIC, max lag=9)

t-Statistic Prob.*

Augmented Dickey-Fuller test statistic -8.064434 0.0000

Test critical values: 1% level -3.639407 5% level -2.951125 10% level -2.614300 *MacKinnon (1996) one-sided p-values. As above results show value of trace statistic and critical value at 1%, 5%, 10%. The value of absolute trace statistic should be greater than absolute value of critical value at 1% so in above table trace statistic is -8.06 which is greater than -3.63. So we can say that is stationary at (1) level.

Augmented Dickey Fuller (ADF) Test for INFLATION Table 03: Unit Root Test for Inflation Level 1

Null Hypothesis: D(INFLATION) has a unit root

Exogenous: Constant Lag Length: 7 (Automatic – based on SIC, max lag=9)

t-Statistic Prob.*

Augmented Dickey-Fuller test statistic -4.156171 0.0034

Test critical values: 1% level -3.699871 5% level -2.976263 10% level -2.627420 *MacKinnon (1996) one-sided p-values. As above results show value of trace statistic and critical value at 1%, 5%, 10%. The value of absolute trace statistic should be greater than absolute value of critical value at 1% so in above table trace statistic is -4.15 which is greater than -3.69. So we can say that is stationary at (1) level.

Augmented Dickey Fuller (ADF) Test for IMPORTS Table 04: Unit Root Test for Imports Level 0

Null Hypothesis: IMPORTS has a unit root

Exogenous: Constant Lag Length: 0 (Automatic – based on SIC, max lag=9)

t-Statistic Prob.*

Augmented Dickey-Fuller test statistic -3.719558 0.0080

Test critical values: 1% level -3.632900 5% level -2.948404 10% level -2.612874 *MacKinnon (1996) one-sided p-values. As above results show value of trace statistic and critical value at 1%, 5%, 10%. The value of absolute trace statistic should be greater than absolute value of critical value at 1% so in above table trace statistic is -3.71 which is greater than -3.63. So we can say that is stationary at (0) level.

Augmented Dickey Fuller (ADF) Test for EXPORTS Table 05: Unit Root Test for Exports Level 0

Null Hypothesis: EXPORTS has a unit root

Exogenous: Constant Lag Length: 0 (Automatic – based on SIC, max lag9)

t-Statistic Prob.*

Augmented Dickey-Fuller test statistic -4.905919 0.0003

Test critical values: 1% level -3.632900 5% level -2.948404 10% level -2.612874 *MacKinnon (1996) one-sided p-values. As above results show value of trace statistic and critical value at 1%, 5%, 10%. The value of absolute trace statistic should be greater than absolute value of critical value at 1% so in above table trace statistic is -4.90 which is greater than -3.63. So we can say that is stationary at (0) level.

important notes:

World Bank definition: GDP at purchaser’s prices is the sum of gross value added by all resident producers in the economy plus any product taxes and minus any subsidies not included in the value of the products. It is calculated without making deductions for depreciation of fabricated assets or for depletion and degradation of natural resources. Data are in current U.S. dollars. Dollar figures for GDP are converted from domestic currencies using single year official exchange rates. For a few countries where the official exchange rate does not reflect the rate effectively applied to actual foreign exchange transactions, an alternative conversion factor is used.

Inflation in Afghanistan and other countries is usually calculated as the percent change in the Consumer Price Index (CPI) from one year to the next. The CPI represents the prices paid by the average urban consumer in each respective country. Inflation can also be calculated with other price indexes such as the Produce Price Index or the so-called GDP deflator. Most countries try to keep inflation somewhere around 2-3 percent per year. That is too low to cause any problems for the businesses and households. At the same time, it is comfortably away from negative inflation, i.e. from deflation. Of course, this target is often missed. Inflation rankings around the world. Create and download charts for Afghanistan Inflation and other indicators with the country comparator.

World Bank definition: Inflation as measured by the consumer price index reflects the annual percentage change in the cost to the average consumer of acquiring a basket of goods and services that may be fixed or changed at specified intervals, such as yearly. The Laspeyres formula is generally used.

Inflation – country data from around the world:

The average for 2015 was 3.97 percent. The highest value was in Venezuela: (121.7) percent and the lowest value were in Lebanon: (-3.7 percent). Below is a chart for all countries where data are available for: Inflation.

1.4 scheme of the study:

Overview of the Chapters:Chapter#1 is the introduction that presents the clear picture of the research which consist of background the of the study that brief the history of the relevant topic, objective of the report represent the aim of the research, and significant of the study shows the benefits of the study for the readers. Essential information is provided in order to get a general view of the dissertation

Chapter#2 literature review of the dissertation is presented. This chapter includes topics.History of mobile industry in Afghanistan and also discussing different type of mobile technologyies.

Chapter#3 is the methodology focusing what method the researcher used. And also the researcher used tools that have used in this topic. It is required to mention the type of the research has been carried out.

Chapter#4 is the finding and Analysis of the data which have been produced from dissemination and recollection of the questionnaires. In chapter four the data collects from the respondents presenting their ideas in an optional way and I have first represent the respondents’ ideas in diagrams and then i explain their ideas.

Chapter#5 is the conclusion and recommendation for some telecommunication companies.

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