Macroeconomic Variables, Exchange Rate and Comparing the Methods of Bilateral Differences and Individual Variables

Aim and Introduction The purpose of this article is to compare two methods of bilateral differences and individual variables to investigate the impact of macroeconomic variables on the exchange rate. The model used in the research is the monetary model with sticky prices (SPMM), which is used in order to improve the accuracy of the estimates from the Elastic Net. Research variables include exchange rate, gross domestic product (GDP), real interest rate (IR), consumer inflation (IN) and liquidity (M2) for two groups of developed and less developed countries. It has been estimated seasonally during the period from 1996 to 2022. Methodology The model used in this article is the modified model of Biswas et al. (2022) and by using the SPMM model, the impact of macroeconomic variables on the exchange rate for developed and less developed countries is estimated in the form of bilateral difference methods and individual variables. In this regard, the model simulation analysis is explained first, and then the SPMM model is estimated and described using the variables of bilateral differences and individual variables. Results and Discussion The results of the research show that when the real model uses individual variables, the estimation of the model using the two-sided differences method increases the mean square error (MSE), and when the real model uses two-sided differences, the estimation of the model using the ndividual variables method produce higher MSE. In general, the findings of the research show that using individual variables to estimate the real model is more accurate, but the accuracy of the estimates may decrease in certain conditions. Therefore, it is important to consider various factors such as true model complexity, error term size, and sample size when choosing between individual variables and pairwise differences. Conclusion Other research findings show that model estimation using individual variables and elastic network leads to lower MSE than bilateral differences. In addition, the reduction of MSE among less developed countries are more than that of developed countries. Also, the impact of macroeconomic variables on the exchange rate is stronger in less developed countries than in developed countries