Influence of Interest and Inflation on Exchange Rates

The assignment requires the student to investigate the influence of interest and inflation rates on currency value or exchange rates using statistical tools and a given literature review. The research aims to confirm positive relationships between interest and exchange rate, as well as negative correlations between inflation and currency value.

Dissertation Proposal

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
Overview......................................................................................................................................1
Research aims and objectives......................................................................................................1
Research questions.......................................................................................................................2
Rationale of the study..................................................................................................................3
Significance of the study.............................................................................................................4
LITERATURE REVIEW................................................................................................................4
Theme 1: Impact of inflationary trend on the currency value.....................................................4
Theme 2: Impact of interest rate on currency value....................................................................6
Research gap................................................................................................................................7
RESEARCH METHODOLOGY....................................................................................................8
Research type...............................................................................................................................8
Data collection.............................................................................................................................8
Data analysis techniques..............................................................................................................9
Reliability and validity................................................................................................................9
Research issue............................................................................................................................10
TIMELINE....................................................................................................................................10
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................13

Research Title: to analyze the impact of interest rate and inflation on currency: a study on
Egypt
INTRODUCTION
Overview
Egypt is a transcontinental country and now emerged as one of the world’s first nation
states. From assessment, it has identified that inflation rate prevail in Egypt is showing
fluctuating trend or pattern. In the year of 2017, inflation rate has significantly inclined from
8.65% to 23.54%. This aspect shows that inflationary tendencies are increased to a great extent
which in not a good indicator from the perspective of economic growth. Further, it is estimated
that in 2020 inflation rate of Egypt will account for 7.07% respectively (Egypt inflation rate,
2017). Along with this, it has assessed interest rate is one of the main factors that has an impact
on currency value. Moreover, earning higher return from investment is one of the main
objectives of investors. Thus, in order to fulfill such motive or aim investors make focus on
investing money at global level which in turn resulted into high demand for currency (Ames,
Bagnarosa and Peters, 2017). In this, the present proposal will shed light on the interest and
inflationary trends prevail in Egypt. Besides this, extent to which fluctuations take place in
interest and inflation affects currency value of Egypt will also be analyzed. Along with this, such
proposal also highlights methodology which will be employed by the scholar to present suitable
solution of issue. It also describes the timeline
Research aims and objectives
Aim: The main of the present study is to investigate the impact of interest rate and
inflation on currency in Egypt.
Considering the above aim following aims and objectives have been drafted:
 To analyze the inflationary tendencies take place in Egypt.
 To assess the relationship exists between interest rate and currency value of Egypt.

 To determine the extent to which interest and inflation rate affects currency value in the
context of Egypt.
 To recommend the suitable ways to improve currency through the means of inflation
and interest rates.
Research questions
To carry out study in a structured way, scholar needs to frame questions as per the
research aims and objectives. Hence, by conducting study, scholar will answer following
questions such as:
Q.1 How interest rate policies affect the exchange rate or value in Egypt?
Q.2 What is the extent to which inflationary aspects have an influence on currency in Egypt?
Hypotheses: On the basis of aims and objectives following hypotheses has been
developed by the researcher such as:
Hypothesis 1
H0 (Null hypothesis): There is no significant relationship between interest as well as inflation
rate and currency value.
H1 (Alternative hypothesis): There is a significant relationship between interest as well as
inflation rate and currency value.
Hypothesis 2
H0 (Null hypothesis): There is no significant difference in the mean value of interest rate and
currency value.
H1 (Alternative hypothesis): There is a significant difference in the mean value of interest rate
and currency value.
Hypothesis 3
H0 (Null hypothesis): There is no significant difference in the mean value of inflation rate and
currency value.

H1 (Alternative hypothesis): There is a significant difference in the mean value of inflation rate
and currency value.
 Dependent variable: Currency value of Egypt
 Independent variable: interest and inflation rate
Rationale of the study
What is the research issue?
The rationale behind conducting present investigation is to ascertain the extent to which
interest as well as inflationary trend affects the value of EGP. Moreover, without having
information about the same, concerned authorities would not become able to develop suitable
policies regarding interest. Along with this, to exert control on inflationary trends Egyptian
authorities require information about the extent to which it impacts the value of EGP.
Why it is the issue?
Aim of the present study is considered as an issue because exchange rate is highly
influences from the level of economic growth and development. Further, inflation and interest
are the main aspects that considered by the respective or concerned authorities of country for
ensuring high level of growth in the economical aspects. Hence, by keeping such aspect in mind
two variables are selected by the researcher such as inflation and interest rate. Thus, through
laying emphasis on both such elements scholar will determine their influence on currency value
of Egypt.
Why it is the issue now?
The concerned topic is considered as issue now because in the past five years from 2012
to 2017 fluctuating trend has found in the currency value. In the year of 2017, value of Egyptian
pound depreciated significantly over the time frame in against to US$. This is one of the main
reasons due to which it is considered as issue now. In 2013, USD/ EGP accounted for 8.99,
whereas in 2017 it reached on 19.30 which in not a positive indicator. Along with the exchange
rate, fluctuating trend has found or assessed in interest and inflation rate. Thus, for making
improvement in the currency value it is highly important to determine the factors such as interest
and inflation rate that have influence on the currency value.

How this research could shed light on?
This research will shed light on the variable that has higher or significant impact on
currency value. For this, researcher will do quantitative investigation and thereby presents the
extent to which exchange rate is getting affected from the changes which take place in the
interest as well as inflation rates.
Significance of the study
The present study and its outcome are highly valuable for other scholars who
want to conduct study on similar topic or issue. In the present times, scholars are highly
interested on conducting study on topic which is related to the economical aspects. Thus,
considering such aspect it can be presented that study will provide deeper insight to other
researchers about the extent to which value of currency is getting affected from interest and
inflationary aspects. Referring such aspect it can be depicted that such will help other scholars in
gaining deeper insight about the concerned research area and helps in developing suitable
hypothesis for the further study. Along with this, such study will also assist higher or concerned
authorities of Egypt in developing suitable policies pertaining to interest and inflation rate which
in turn places positive impact on currency value. Along with this, study and its findings will also
prove to be fruitful for other countries and gives input to them in relation to setting suitable
policies regarding inflation and interest rates. Hence, considering overall evaluation it can be
presented that study and its findings will offer assistance to other scholars and authorities to the
significant level.
LITERATURE REVIEW
LR is the process that lays high level of emphasis on the preparation of brief thesis
through evaluating books, journals and scholarly articles. Hence, it implies for the efforts which
are undertaken by the researcher for attaining aims and objectives in a brief manner.
Theme 1: Impact of inflationary trend on the currency value
According to the views of Majumder, Ray and Santra (2017), exchange and inflation rate
is highly related to one another. On the basis of such aspect, weak Egyptian dollar provides high
level of assistance to the businesses and industries that lay high level of emphasis on exports

which in turn offers high level of income to them. In other words, it can be depicted that when
currency drops then cost in relation to the foreign consumers fall to the significant level. In this,
there are high chances that they will buy more. Thus, by decreasing the level of inflation country
can enhance the demand for products or services and would become able to bring back the
equilibrium position of exchange rate. Further, Bahmani-Oskooee and et.al., (2017) stated in
their study that, as per the purchasing power parity, exchange rate pertaining to two currencies is
closely influences from the level of inflation exists. Such theoretical framework entails that value
of currency in against to other country is strengthened when inflation rates are lower. On the
other side, higher inflation rate tend to weaken the exchange rates. The rationale behind this,
when weak production of local goods and services take place then depreciation level of currency
is increased through the means of pass through effect. It means when currency is depreciated
then import becomes expensive due to the incline in prices. Hence, PPP theory clearly entails the
association take place between inflation or exchange rate.
On the critical note, Yun (2017) claimed that such theory ignores other real determinants
or elements. PPP theory only highlights the link exist between purchasing power and exchange
rate. However, it ignores other factors such as import, export etc which are also highly associated
with the operational aspects. Further, theory of PPP overlooks the level to which demand and
supply has an impact on foreign exchange. Bell, Brooks and Moore (2017) identified that
inflation and exchange rates are significantly related. On the basis of such aspect, when inflation
rate of home country is high in relation to other countries then it may result into decline in the
value of currency. Moreover, high inflationary trend entails that price of the goods pertaining to
home country increases over others. This in turn may result into decline in the level of demand
for products or services, so meanwhile there is less demand for home currency.
For instance: When due to inflation, price of Egyptian goods or services increase as
compared to US then offering of Egypt becomes less competitive. Hence, due to the higher
prices demand related to Egyptian goods will decrease or fall and therefore decline in the need
for EGP. Thus, referring all the above aspects it can be presented that inflation rate affects
exchange rates to a great extent. However, it is to be critically evaluated by Iyke and et.al.,
(2017), who said that PPP theory considers the prices of goods only in the case of foreign trade.
Such assumption seems to be illogical because there is no direct relationship exists between

internal and international prices of goods. Almasri and et.al., (2017) argued that value or
exchange rate of home currency decreases when supply is higher. For example: In case, when
Egyptian consumers find that US imports are highly attractive then it will lay more focus on
supplying EGP to buy US$. In this regard, increasing supply level of home currency will
negatively impact the value of EGP. Hence, in the context of long run, changes occurred in the
inflation rates have significant influence on the exchange rate (Egypt inflation rate, 2017).
Theme 2: Impact of interest rate on currency value
In accordance with the views of Gandolfo (2016), through the means of monetary policy,
central bank makes efforts in relation to adjusting the interest rate with the motive to exert
effectual control on the rate of lending’s. Boschen and Smith (2016) investigated and found
positive relationship between interest rate and currency value. As per the interest rate parity
(IRP) theory, indicates that when high money is available to the customers on cheaper rate then it
weakens currency over the time frame. Along with this, referring IRP theory, Ding and Kim
(2017)stated that when there is allowance to move capital freely in the market or across borders
then investors give level of priority to the country which is offering higher returns to them. On
the basis of such aspect, money flow will be high in the country where interest rate is greater as
compared to others. This in turn may result into appreciation in the weaker currency. However, it
is to be critically evaluated by Ames, Bagnarosa and Peters (2017), who argued that high interest
rates on deposits enhance purchasing power of the individuals of home country as well. Hence,
sometimes increasing purchasing power has greater influence on the inflation and thereby result
into decline in exchange rate.
Ardoin and Rodriguez (2017) depicted in their study that when interest rate of the
concerned country is higher then it places positive impact on currency value. Moreover, high
rates on deposits attract more foreign investors which in turn may result into rise in the exchange
rate of domestic currency. Ames, Bagnarosa and Peters (2017) claimed that inverse relationship
exists between high interest rate and inflation. In this, country can enhance exchange rate only
when it ensures balance between interest and inflation rates. In other words, it can be presented
that exchange rate is likely to rise when country increases interest rate without inclining the level
of inflation. Along with this, Boschen and Smith (2016) identified that on the inclination in the
interest rate of one country, in the form of reaction value of currency increases to a great extent.

Thus, with the aim to defend local currency sometimes Central Bank lays high level of emphasis
on increasing interest rates. Considering the same, it can be highlighted that currency value can
be appreciated in against to FOREX by raising the level of interest rates.
Gandolfo (2016) assessed that effect of increasing interest rate is positive on the value of
currency. Considering evaluation of article, it has found that increasing interest rate means better
or high returns on saving accounts. In this situation, demand for home currency will increase
which in turn may result into value appreciation (Inflation and Exchange Rates, 2017). For
instance: If interest rate in Egypt increases from 19& to 20 or 22% then for the generation of
high returns foreign investors start making investment in such country. In this case, demand for
EGP will increase significantly which in turn may result into exchange rate appreciation.
Conceptual framework
Research gap
By doing evaluation of articles, it has assessed that scholar has discussed theories in
relation to inflation as well as interest rate and its association with currency value. Secondary
data set such as books, journals and scholarly articles present that earlier theories pertaining to
Egypt evaluation

interest rate and purchasing power parity was discussed by the researchers. However, there are
no specific studies were conducted by scholars on Egypt. From evaluation, it has assessed that
highly fluctuated trend takes place between interest and inflation rate of Egypt in past years.
Thus, considering such varying trend scholar can ascertain the impact of interest and inflation
rate on the currency value. Hence, by assessing such gap scholar has selected such topic and will
makes effort in relation to identifying suitable solution of the concerned issue.
RESEARCH METHODOLOGY
For assessing suitable solution of issue following methods, tools and techniques will be
considered by the researcher:
Research type
In research, there are mainly two types such as qualitative and quantitative that research
can select for conducting study in an appropriate manner. Under qualitative investigation, scholar
places high level of emphasis on analyzing underlying facts and opinions. It comes under the
category of exploratory research or study which in turn provides assistance in developing
hypothesis for quantitative research (Flick, 2015). On the other side, quantitative investigation is
applied where solution of research issues is based on numeric data set. Hence, in this, scholar
presents solution by evaluating numeric facts and figures. In the present study, quantitative
research will be conducted by the scholar. On the basis of such aspect, by making evaluation of
interest rates, inflation and currency value scholar will present the extent to which all such three
variables are associated with each other.
Data collection
In order to gather data set for the study, scholar can use primary and secondary data
sources. For presenting appropriate solution scholar is required to gather and analyze suitable
data. Primary data sources include survey, observation, focus group, interview etc which in turn
helps in collecting raw information for the evaluation purpose. In other words, it can be stated
that data which is gathered by the scholar for first time to meet research objectives is known as
primary (Mackey and Gass, 2015). On the other side, data which is gathered through the means
of books, journals and scholarly articles is known as secondary. For answering research
questions scholar will gather data through using secondary sources. Hence, scholar will evaluate

books and scholarly articles that are related to the research topic such as an impact of interest &
inflation on currency values. Besides this, scholar will also gather data of interest, inflation and
currency value of Egypt pertaining to 5 years period considering half yearly basis. Thus, by
gathering and using secondary data scholar will meet research aim.
Data analysis techniques
Appropriateness of solution is highly based on tools and techniques considered for the
purpose of evaluation. Techniques of data collection are highly based on type of research or
study undertaken. Under qualitative study, scholar conducts thematic analysis to determine
suitable results (Flick, 2015). In this, scholar prepares several themes considering questionnaire
and thereby exhibits results along with the graphical presentation. On the other side, statistical
tools are undertaken by the researcher to evaluate quantitative data set. Hence, SPSS tools and
techniques will be used by the scholar to ascertain the impact of inflation and interest rate
movement on currency value. In accordance with such aspect, correlation tool will be applied by
the researcher to assess the extent to which inflation, interest and currency value is related with
each other. Through this, scholar would become able to determine the impact of interest and
inflation rate Egypt’s currency value and thereby fulfills aims and objectives. Along with this,
regression tool will be considered to assess the effect of inflationary trends and interest rate
policies on currency value. On the basis of such aspect, scholar will be in position to determine
whether mean value of concerned variables differ or not. Regression tool will help in
ascertaining the impact of one variable on another in a significant way.
Regression variable: X, Y
Here, x and y denotes for the following:
 X: Independent variable ‘
 Y: dependent variable
Hence, through applying regression model or tool scholar will depict the level to which one
variable have an impact on another. Hence, through evaluating P value scholar will depict the
manner in which interest and inflation rate of Egypt has an impact on currency value.

Reliability and validity
Scholar will use latest data sources such as books and scholarly articles that published
after the period of 2007. This in turn ensures high level of validity the study and its outcome.
Along with this, scholar will consider sources that are related to the interest, inflation rate and
currency value. Besides this, for getting predetermined results scholar will not make any
modifications in the values of interest and inflation as well as currency value of Egypt. Further,
scholar will consider sources that protected through the means of copyright. The reason behind
this, sources which are protected through special mark offer highly reliable information over
others.
Research issue
Time and lack of availability of the resources is one of the main limitations that closely
impact the significance of study as well as its outcome. Due to having limited time frame data
pertaining to only 5 years will be considered by the scholar. Further, another limitation is that
now for accessing data set or information several websites demand for money. On the other sites,
some sites are protected through specific security arrangement that cannot be accessed via small
efforts. Hence, to avoid such limitation in-depth research will be conducted by the scholar to
gather appropriate data set. Referring all such aspects it can be stated that best possible efforts
will be made by the researcher to avoid limitations.
TIMELINE
In order to conduct study in a prominent and presenting outcome within the suitable time
frame scholar will follow below mentioned timeline. This in turn gives clear indication to the
researcher about the time when activity needs to start and finish. Thus, in the context of present
study specific timeline this will be followed as under:
Activities /
months
1 2 3 4 5 6 7 8 9 1
0
1
1
1
2
1
3
1
4
1
5
1
6
1
7
1
8
1
9
2
0
2
1
2
2
2
3
Selection of
research
topic

Preparing
brief
proposal
Formulation
of research
aim and
objectives
Secondary
data
analysis for
the
preparation
of brief
thesis
Assessing
research
methods,
tools and
techniques
Collecting
secondary
data about
interest,
inflation and
exchange
rate
Applying
quantitative
or statistical
tools
Findings

and
discussion
Drawing
conclusion
Giving
recommend
ations
Doing
proper
formatting
and
arranging
report in a
structured
way
Taking
feedbacks
Doing
modifications
Final
submission
CONCLUSION
From the above proposal, it has been concluded that study makes focus on identification
of factors that has an impact on the exchange rate of Egypt whether interest or inflation. By
doing literature, it has assessed that positive relationship exist between interest and exchange
rate. Further, it can be seen in the proposal that inflation and currency value is negatively
correlated. Besides this, it can be inferred that quantitative investigation will be conducted by the
researcher to analyze the influence of interest and inflation rates on currency value or exchange

rates. Scholar will undertake statistical tools to analyze secondary data set and thereby addresses
research objectives.

REFERENCES
Books and Journals
Almasri, A. and et.al., 2017. A wavelet-based panel unit-root test in the presence of an unknown
structural break and cross-sectional dependency, with an application of purchasing power
parity theory in developing countries. Applied Economics. 49(21). pp.2096-2105.
Ames, M., Bagnarosa, G. and Peters, G. W., 2017. Violations of uncovered interest rate parity
and international exchange rate dependences. Journal of International Money and
Finance. 73. pp.162-187.
Ardoin, E. and Rodriguez, A., 2017. NEGATIVE INTEREST RATES AND A POSSIBLE RIFT
IN INTEREST RATE PARITY AND ARBITRAGE. International Journal of Business,
Accounting, & Finance. 11(2).
Bahmani-Oskooee, M. and wet.al., 2017. Revisiting purchasing power parity in Eastern
European countries: quantile unit root tests. Empirical Economics. 52(2). pp.463-483.
Bell, A. R., Brooks, C. and Moore, T. K., 2017. Did purchasing power parity hold in medieval
Europe?. The Manchester School. 85(6). pp.682-709.
Boschen, J. F. and Smith, K. J., 2016. The uncovered interest rate parity anomaly and trading
activity by non-dealer financial firms. International Review of Economics & Finance. 45.
pp.333-342.
Ding, H. and Kim, J., 2017. Inflation-targeting and real interest rate parity: A bias correction
approach. Economic Modelling, 60, pp.132-137.
Flick, U., 2015. Introducing research methodology: A beginner's guide to doing a research
project. Sage.
Gandolfo, G., 2016. International Interest-Rate Parity Conditions. In International Finance and
Open-Economy Macroeconomics (pp. 53-66). Springer Berlin Heidelberg.