ADVANCE RESEARCH METHOD

ROLE OF CURRENCY

Submitted to: Dr Tasneem Akhtar
Submitted By:
Name IDs
Jabbar Ahmad 10223006

Submission Date: 08 February, 2013
GIFT Business School
GIFT University

Executive Summary
The problem is the unstable regulation of currency lead towards disability of economies.
The foreign exchange value of a currency that either results in a sharp
depreciation or forces the authorities to defend the currency by selling foreign
exchange reserves or raising domestic interest rates. For an economy with a fixed
exchange rate regime, a currency crisis usually refers to a situation in which the
economy is under pressure to give up the prevailing exchange rate. I m identified
this problem research many articles and study many books and watch lot of
knowledgeable videos which I m see that every country suffer its currency. Many
countries facing currency like Malaysia, Singapore, and many other countries. In
recent Europe facing currency problem. I m providing this problem solution in the
sense of Islamic Thoughts. Where Islam teach that follow the gold system
(dirham and dinar) where the currency is not devalued. When the currency is not
devalued the country is not facing financial problems. My research study
respondents are many bankers, investors, brokers, and students. SPSS software for
the analysis of my study. The usefulness of this study is that when the economies
are following the Islamic Capital Market & Instruments. In this system the price
of currency is not devalued. The economy is not suffer the financial problems like
devaluation of money, inflation and balance of payment and many other problems
are not facing.







Acknowledgement
In the name of ALLHA ALMIGHITY the lord of the world who has bestowed us with abilities
and blessed with knowledge so that we can make best of opportunities provide to us. First
of all we are indebted toward ALLHA ALMIGHTY who has created us and made
capable enough to with stand in the competitive world.
Our deepest gratitude and warmest appreciation to our respected and worthy teacher
Dr. Tasneem Akhtar for his guidance and support in the duration of the study. His timely
guidance and motivation as well as his endless encouraging behavior throughout in the
duration of this course has been exemplary if words could pay gratitude then we would
like to pay our esteem gratitude. Last but not least we are thankful to our friends who
give us support and help us while collecting data which was actually not an easy task. We
are very grateful to every person who help us directly or indirectly to fulfill this
responsibility.









Table of Contents
Description Page #
Executive Summary 2
Acknowledgement 3
List of Tables 5
Introduction 6
Literature Review 8
Theory 10
Framework 11
Variable definition 12
Research Methodology 14
Data Analysis 15
Recommendations 17
References 17
Appendix 21









List of Tables
Descriptive Statistics
Model Summary
Coefficients

List of Figure
Framework











Introduction
The role of currency is only as a tool or a means of exchanging goods. Its value is derived from
the faith people have in the currency. For any currency to have a value people must be
able to accept it as a means which they will part or exchange other items for it. Currency
has no value. It is only how we perceive currency that gives it value.
In todays world, currency is bought and sold in the international currency market or foreign
exchange market for those not in the financial sector. National currencies are valued
independently due to the nation central banking system which is independent from one
another. However each currency in today market from the strongest to the weakest are all
dependent and interconnected with each other for purposes of value and stability. The
trading between national currencies is important in the overall value of a single country
currency. How active the foreign exchange market also tells the story of what the
financial community thinks of the global economy at that time. The foreign exchange is
often the barometer for influences on the world economy as it is often the first market to
react whenever there is a dip or boom in the global economy.
The players who are big in foreign exchange market are banks, large commercial entities hedge
fund investment firms and central banks of the nations. Hedge funds and central banks
are the two biggest influences on the foreign exchange market. Although not all central
banks do it but some central banks do trade in the foreign exchange market. They do this
for a multitude of reasons. Among the reasons include synchronizing the country interest
rates in line with the other countries and to stabilize the currency of the country so that
the import and export of goods can be completed in an orderly manner. Some central
banks also use the foreign exchange market to control fiscal issues like inflation. .
Currency crises have large, measurable costs on an economy, but the ability to predict the timing
and magnitude of crises. Sudden speculative attack on a fixed exchange rate, even though it
appears to be an irrational change in expectations, can result from rational behavior by
investors.(Krugman). Currency crises have explored how problems in the banking and
financial system interact with currency crises, and how crises can have real effects on the
rest of the economy.
Problem definition
A currency crisis may be defined as a speculative attack on the foreign exchange value of a
currency that either results in a sharp depreciation or forces the authorities to defend the
currency by selling foreign exchange reserves or raising domestic interest rates. For an
economy with a fixed exchange rate regime, a currency crisis usually refers to a situation
in which the economy is under pressure to give up the prevailing exchange rate peg or
regime.
A currency crisis, which is also called a balance-of-payments crisis, is a speculative attack in the
foreign exchange market.
Unstable regulation of currency lead towards disability of economies

Objectives
To explore the role of currency note in economies

Research Questions
Does currency no play any role in economics ups and downs in a country?
What is role of currency note in case of inflation?
Do we debt rid of foreign debt if currency note abolished?

Hypothesis
Currency note is causing negative impact on economic cycle

Literature Review
There are two broad traditions with respect to the economic theories of regulation. The first
tradition assumes that regulators have sufficient information and enforcement powers to
effectively promote the public interest. This tradition also assumes that regulators are
benevolent and aim to pursue the public interest. Economic theories that proceed from
these assumptions are therefore often called public interest theories of regulation.
Another tradition in the economic studies of regulation proceeds from different
assumptions. Regulators do not have sufficient information with respect to cost, demand,
quality and other dimensions of firm behavior. They can therefore only imperfectly, if at
all, promote the public interest when controlling firms or societal activities. Within this
tradition, these information, monitoring and enforcement cost also apply to other
economic agents, such as legislators, voters or consumers. And, more importantly, it is
generally assumed that all economic agents pursue their own interest, which may or may
not include elements of the public interest. Under these assumptions there is no reason to
conclude that regulation will promote the public interest. The differences in objectives of
economic agents and the costs involved in the interaction between them may effectively
make it possible for some of the agents to pursue their own interests, perhaps at the cost
of the public interest. Economic theories that proceed from these latter assumptions are
therefore often called private interest theories of regulation. Fundamental to public
interest theories are market failures and efficient government intervention. Some
researchers consider and evaluate various definitions and attempt through systematization
to make the term amenable to further analysis (Baldwin and Cave, 1999; Morgan and
Yeung, 2007; Ogus, 2004). Others almost entirely abstain from an exact definition of
regulation (Ekelund, 1998; Joskow and Noll, 1981; Spulber, 1989; Train, 1997). These
theories are often thought to be normative theories as positive analysis (Joskow and
Noll, 1981), implying that the evaluative theoretical and empirical analysis of markets
has been used to explain actual regulatory institutions in practice. The public interests
theories of regulation are described as rationalizing existing regulations while private
interest theories are discussed as theories that explain existing regulation (for example
Ogus, 2004). Models of currency crises suggest that weak or unsustainable economic
policies are the cause of exchange rate instability. These models provide a partial
explanation of the Asian currency crisis but they cannot account for its severity. A more
comprehensive view of the turmoil in Asia takes into account the interaction of policy
and volatile capital markets. Weak policy makes a country vulnerable to abrupt shifts in
investor confidence; the sudden rise of investor expectations of a crisis can force a policy
response that validates the original expectations. Two additional factors help explain the
severity of the Asia crisis: inadequate supervision of the banking and financial sectors in
the affected countries and the rapid transmission of the crisis through structural links and
spillover effects among the countries. Their financial and banking systems did not suffer
from the same structural weaknesses and fragility observed in the crisis countries. And
finally, they were perhaps less exposed to forms of so-called crony capitalism with
intermingled interests among financial institutions, political leaders, and corporate elite.
Conversely, the Asian countries that came under speculative attack in 1997 Thailand,
Malaysia, Indonesia, the Philippines, and South
Koreahad the largest current account deficits throughout the 1990s. Although the degree of
real appreciation over the 1990s differed widely across Asian countries, all the currencies
that crashed in 1997, with the important exception of Koreas, had experienced a real
appreciation (Corsetti, Pesenti, and Roubini 1999b and Tornell 1999). The major
fundamental weakness of the Asian countries consisted of the exposed position of the
banking and corporate sectors in an environment of limited prudential supervision.
Indeed, it has been argued that the Asian miracle occurred despite significant distortions
of the market mechanism in the financial sector. In the presence of extensive controls and
limits on foreign borrowing, these distortions did not translate into high domestic
vulnerability to external shocks.



Theory
According to this theory, when there is free market situation, the exchange rates are determined
by the market forces i.e. demand for and supply of the foreign exchange. This theory is
based on simple market mechanism in which the price of any commodity is determined.
the term 'balance of payments' is used in the sense of a market balance. If the demand for
a country's currency falls at a given rate of exchange, we can speak of a deficit in its
balance of payments. A deficit balance of payments leads to a fall or depreciation in the
external value of the country's currency. A surplus balance of payments leads to an
increase or appreciation in the external value of the country's currency.
Financial crises have been pervasive phenomena throughout history. Bordo et al. (2001) find that
their frequency in recent decades has been double that of the Bretton Woods Period
(1945-1971) and the Gold Standard Era (1880-1993), comparable only to the Great
Depression. Nevertheless, the financial crisis that started in the summer of 2007 came as
a great surprise to most people. Diamond and Rajan (2006) introduce money and nominal
deposit contracts into the model in Diamond and Rajan (2001) to investigate whether
monetary policy can help alleviate this problem. They assume there are two sources of
value for money. The first arises from the fact that money can be used to pay taxes (the
fiscal value). The second arises from the role of money in facilitating transactions (the
transactions demand. Makarov and Plantin (2009) analyze changes in house prices in an
economy where banks grant mortgages to liquidity-constrained households to finance a
fixed supply of homes. Households aggregate debt capacity drives the aggregate demand
for homes. Home supply at a given date stems from foreclosures in case of default, sales
motivated by the acquisition of a larger home, and sales that follow exogenous moving
decisions.














Framework















Unstable regulation
of currency lead
towards disability
of economies
Political
Instability
Inflation in
economy
Debt Rate
Devaluation of
money
Exchange rate
Variable definition
Currency devaluation
A deliberate downward adjustment in the official exchange rates established, or pegged, by a
government against a specified standard, such as another currency or gold.
Devaluation in modern monetary policy is a reduction in the value of a currency with respect to
those goods, services or other monetary units with which that currency can be exchanged.
Devaluation means official lowering of the value of a country's currency within a fixed
exchange rate system, by which the monetary authority formally sets a new fixed rate
with respect to a foreign reference currency.

Political instability
the uncertainty associated with an unstable political environment may reduce investment and the
speed of economic development. On the other hand, poor economic performance may
lead to government collapse and political unrest.
Exchange rate
Exchange rates allow you to determine how much of one currency you can exchange for another.
The price of one country's currency expressed in another country's currency. In other
words, the rate at which one currency can be exchanged for another. For example, the
higher the exchange rate for one euro in terms of one yen, the lower the relative value of
the yen.

Debt Rate
Debt capital divided by total assets. It is conventional to consider both current and non-current
debt and assets. The less risky the company is since excessive debt can lead to a very
heavy interest and principal repayment burden. A debt rate is defined as a situation when
either or both of following conditions occur: (1) there are arrears of principal or interest
on external obligations towards commercial creditors (banks or on dholders) of more than
5 percent of total commercial debt outstanding(2) there is a rescheduling or debt
restructuring agreement with commercial creditors as listed in Global Development
Finance (World Bank). The 5 percent minimum threshold is to rule out cases in which the
share of debt in default is negligible, while the second criterion is to include countries
that are not technically in arrears because they reschedule or restructure their debt
obligations before defaulting.Detragiache and Spilimbergo (2001).

Inflation
The term "inflation" to refer to a rise in the price level. An increase in the money supply may be
called monetary inflation, to distinguish it from rising prices, which may also for clarity
be called 'price inflation. (Michael F. Bryan). The essence of inflation is not a general rise
in prices but an increase in the supply of money, which in turns sets in motion a general
increase in the prices of goods and services. "Inflation, as this term was always used
everywhere and especially in this country, means increasing the quantity of money and
bank notes in circulation and the quantity of bank deposits subject to check. But people
today use the term `inflation' to refer to the phenomenon that is an inevitable
consequence of inflation, that is the tendency of all prices and wage rates to rise.

Unstable regulation of currency lead towards disability of economies
Traditional models of currency crises suggest that weak or unsustainable economic policies
are the cause of exchange rate instability




Research Methodology
Sample size and technique
For our research project, we choose sample size of 150 respondents within Sialkot, Gujranwala
and Lahore region. Technique which is going to use in our project is convenient
sampling.
Population Frame
Population frame of our research project is Sialkot, Lahore and Gujranwala region
Unit of analysis
In our project we are using questionnaire as a unit of analysis through which we are collecting
data related to our research study.
Type of study
Our research study type is exploratory because we are going to explore the currency problems.
Data Collection method
We are collection data from questionnaire which are filled bankers, investors, business students.
We are using questionnaire as a primary source through data collected.
Data analysis tools
After collecting data we are using multiple regression method through we can evaluate the
change in dependent variable which brings because of change in independent variables.
Im use multinomial logit model.



Data Analysis


Descriptive Statistics

Mean Std. Deviation
INF 4.8529 .59697
DVv 5.4851 .36916
DT 5.5168 .40127
PI 5.4535 .39989
EX 5.4843 .41975
UNCRDE 5.1980 .46276

Interpretation
From above calculation we interpret that, first variable Inflation in the economy average value is
4.8529 which shows the average respondents agree or strongly agreed on that inflation on
economy lead the currency towards disability of economies. The results show that there is
.59697 deviations among that data with mean value. The mean value of the dependent
variable change in currency lead to disability of economy, its average value is 5.19 which
show that average respondents are strongly agreed on that deregulation in the currency
lead the disability of economy.
Regression
As dependent variable is quantitative , so by applying the least square method, regression on the
study model.




Model Summary
Model R R Square
Adjusted R
Square
Std. Error of the
Estimate
1 .304
a
.58 .53 .44654
a. Predictors: (Constant), EX, INF, PI, DVv, DT

From above table, we conclude that overall model 58% explain the study or impact on the
main factors. Whereas according to adjusted R square we conclude that all
factors which include in the study explain the dependent by 53%.


Coefficients
a

Model
Unstandardized Coefficients
Standardized
Coefficients
T Sig. B Std. Error Beta
1 (Constant) 3.019 1.049

2.877 .005
INF .212 .076 .279 2.788 .006
DVv .061 .129 .050 .477 .634
DT .011 .120 .010 .092 .927
PI .088 .116 .078 .764 .447
EX .051 .120 .046 .424 .004
a. Dependent Variable: UNCRDE

From above table we conclude that if the all factors are zero then dependent variable
deregulation of currency still disability the economy by 3.019. Furthermore, if the first
variable inflation change with one unit then the currency deregulated by the .212 and if
the devaluation of money change by the one unit then the currency deregulated change
the .061 and other factors explain as same.
According to the significance value if the value is between 0-0.1 then it is significant and we
accept the hypothesis. Inflation and exchange rate show the significant result but other
variable are insignificant that s y, we reject them.
Recommendations
I m recommend to this one hypothesis is our study is accepted and other hypothesis is
rejected. The accepted hypothesis is inflation and exchange rate of currency.
Those economies are follows the western banking system and exchange that
economies are suffered. We recommend that Islamic Capital Market &
Instruments. In Islamic currency which is dirham and dinar.


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Appendix


Strongly
Disagree
Moderately
Disagree
Disagree Neutral Agree Moderately
agree
Strongly
Agree
1 2 3 4 5 6 7
Role of Currency
We are conducting a research study on Role of Currency. Please give us some time to fill this
questionnaire. Thank you
Inflation


1. Do you have inflation in your country? 1 2 3 4 5 6 7
2. Does inflation impact your life style? 1 2 3 4 5 6 7
3. Does your government take any measure to
control inflation?
1 2 3 4 5 6 7
4. Does inflation impact the currency? 1 2 3 4 5 6 7
5. Do you believe that money supply and
inflation are interrelated?
1 2 3 4 5 6 7
Devaluation


1. Is your currency devalued? 1 2 3 4 5 6 7
2. Do you believe that export of the country is
related to devaluation?
1 2 3 4 5 6 7
3. Does devaluation increase the inflation? 1 2 3 4 5 6 7
4. Devaluation of currency is good for country? 1 2 3 4 5 6 7
5. Does devaluation impact common person? 1 2 3 4 5 6 7
Debt


1. Debt and inflation are interrelated 1 2 3 4 5 6 7
2. Does debt increase the devaluation? 1 2 3 4 5 6 7
3. Does debt change your life style? 1 2 3 4 5 6 7
4. Does debt impact the currency? 1 2 3 4 5 6 7
5. Does your policy maker use debt in a right
way?
1 2 3 4 5 6 7
Political Instability


1. Is political instability impact the country? 1 2 3 4 5 6 7
2. Does political instability impacts common
person?
1 2 3 4 5 6 7
3. Does political instability impact country
economy?
1 2 3 4 5 6 7
4. Does political instability impacts foreign
investment?
1 2 3 4 5 6 7
5. Do you think political instability impact stock
exchange?
1 2 3 4 5 6 7
Exchange Rate

1. Does exchange rate impact the currency? 1 2 3 4 5 6 7
2. Does exchange rate devalued the currency? 1 2 3 4 5 6 7



Unstable regulation of currency lead
towards disability of economy

1. Do you believe that unstable regulation
of currency impact the monetary policy of
country?
1 2 3 4 5 6 7
2. Do you believe that unstable regulation
of currency impact the interest rate?
1 2 3 4 5 6 7
3. Does unstable regulation of currency
disable the economy?
1 2 3 4 5 6 7
4. Do you believe that the deregulation of
currency are basic problem of inflation?
1 2 3 4 5 6 7














3. Do you believe that exchange rate is causing
inflation?
1 2 3 4 5 6 7
4. Does exchange rate is effect the balance of
payment?
1 2 3 4 5 6 7
5. Does exchange rate the cause the currency
crisis?
1 2 3 4 5 6 7