Monetary Policy and Foreign Exchange Fluctuations in Cambodia
In this study, the ARMAX model, a univariate time series model, was utilized to assess the impact of broad money supply on the exchange rate between the Khmer Riel and the US Dollar. The maximum likelihood estimation method was employed to estimate the sample parameter using monthly data from January 2011 to March 2023. The findings indicated that the monthly exchange rate and money supply series were integrated at order one or I(1), as demonstrated by the ADF unit root test. The Engle and Granger cointegration test revealed a long-run relationship between EXC and M2. Notably, among the top four ARMAX models, ARMA(1,1) was deemed the best model due to the lowest value of Schwarz Bayesian Information Criteria and was therefore selected. Consequently, an increase or decrease of KHR 100 million in money supply would cause the nominal exchange rate to depreciate or appreciate by approximately KHR 41.8 per US Dollar. The empirical results of this study suggest that the US Dollar Auction, a traditional monetary policy conducted by the central bank, is the most effective tool in controlling fluctuations in the domestic foreign exchange rate.
Keywords: Exchange Rate, Broad Money, ADF test, Engle and Granger Cointegration test, SBIC, ARMAX Model
