Mohammad Hasham Daqiq

Abstract

This study aims to evaluate the central bank of Afghanistan, Da Afghanistan Bank’s monetary policy towards changing the exchange rate and bringing price stability. Two separate regression models were used. The first model investigated the relationship between exchange rate, foreign currency sold on the market and capital notes sold on the market. The second model focused on the relationship between the amounts of narrow and broad money in circulation and the CPI. Eighty-one months of data, from April 2012 to December 2018, were considered.

The results of the first model show that only 40 percent of changes to the exchange rate were caused by Da Afghanistan Bank selling foreign currency and capital notes. The coefficient related to the effect of the sale of foreign currency on the exchange rate had a negative sign, with a significant p-value. However, the coefficient of capital notes had positive sign, which goes against the theoretical argument behind the sale of capital notes. The results of the second model show that changes in the amounts of narrow money and broad money are responsible for 47 percent of changes in the CPI. However, the impact is weak and huge changes in the amount of money in circulation are required to change the CPI. Overall, it could be argued that the monetary policy of the central bank is more effective at influencing the exchange rate, but the government should also consider other factors which influence the price stability.

 

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