Business research methods

Business Research Methods

Research Design

Author: www.magcify.com

Date: 19-Sep-2014

Abstract

The entire information inside this document is all in relation to research design. This research design is all about currency devaluation in Pakistan. In order to develop a research design the secondary data has been taken from WDI. Only quantitative data has been utilized. The core purpose is to examine the factors that are directly or indirectly responsible for the currency devaluation in Pakistan.

We are using independent variable e.g. economic instability, deficit financing and money supply. Our objective is to check the impact of these variables on the currency devaluation in Pakistan. We are applying regression method for analysis purpose.

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Business Research Method Research Design

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Table of Contents

1. RESEARCH DESIGN ----------------------------------------------------------------------------------------------------------- 3

1.1 INTRODUCTION ---------------------------------------------------------------------------------------------------------------- 3

1.2 PURPOSE STATEMENT ------------------------------------------------------------------------------------------------------- 4

1.3 RESEARCH OBJECTIVE ------------------------------------------------------------------------------------------------------ 4

1.4 SIGNIFICANCE OF STUDY ---------------------------------------------------------------------------------------------------- 4

1.5 HYPOTHESIS ------------------------------------------------------------------------------------------------------------------ 5

1.6 LITERATURE REVIEW --------------------------------------------------------------------------------------------------------- 5

1.7 THEORETICAL MODEL -------------------------------------------------------------------------------------------------------- 8

1.8 RESEARCH METHODOLOGY ------------------------------------------------------------------------------------------------- 8

1.9 LIMITATIONS AND DELIMITATION -------------------------------------------------------------------------------------------- 8

1.10 ETHICAL CONSIDERATIONS -------------------------------------------------------------------------------------------------- 9

1.11 REFERENCES ----------------------------------------------------------------------------------------------------------------- 9




1. Research Design

1.1 Introduction

Pakistan being a developing country its economy gets affected by the rise and fall of

Pakistani currency against dollar. During the time of Prime Minister Shaukat Aziz in power

dollar was stable for 60 rupee. When the government changed Pakistani currency

immediately fell seven rupee against dollar. Since then Pakistani currency is falling and

nowadays the value is 104 and the speculation is that it will keep on falling. The devaluation

of currency has a direct impact on local Pakistan traders. Foreign trade such as eatable oil,

raw materials, petroleum and electronics gets expensive. This creates problems for the

traders. Pakistan imports 80 percent of petroleum for its consumption. According to the

Former Finance Minister Dr. Salman Shah, Pakistan spends 13 billion dollar on imports of

crude oil and eatable oil. This provides a boost for domestic demands as exports become

cheaper and more competitive to foreign buyers. Higher level of exports should lead to an

improvement in the current account deficit. This was important in the case of the UK who had

a large current account deficit of over 3% of GDP in 2008. Higher exports and aggregate

demand can lead to higher rates of economic growth. Deficit financing, economic instability

and money supply are the factors that influence our independent variable.

Devaluation means decreasing the value of nation's currency relative to gold or the

currencies of other nations. Devaluation occurs in terms of all other currencies, but it is best

illustrated in the case of only one other currency. Devaluation and Depreciation are

sometimes used interchangeably, but they always refer to values in terms of other currencies

and the value of currency is determined by the interplay of money supply and money

demand. In common modern usage, it specifically implies an 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 currency. In contrast, (currency)

depreciation is most often used for the unofficial decrease in the exchange rate in a floating

exchange rate system.

Sidney, S. A. (2009), examine the relationship between expenditure and real income. The

intent of his study the elasticity’s Approach, the income-absorption approach, effect of

devaluation on income, international monetary fund staff papers, direct effect on absorption

and devaluation compared with other methods. He worked on expenditure and real income.

He used data of 1983-2008. He used Reducing absorption relative to production method for

analysis purpose. At the last he come to know that most fruitful approach to the general

problem of obtaining a satisfactory foreign balance, and in particular of appraising the effects

on the foreign balance of a devaluation, is via the analysis of the income-absorption

relationship. Guillermo, A. C. & Frederic, S. M. (2003) examine the relationship between

domestic output and sticky prices. The focus of their study was on the standard theory of

choosing an exchange rate regime, the Mendel challenge, the realities of emerging market

economies, the ability to have domestic monetary policy & reducing inflation. They variables

were domestic output and sticky prices. They used data of 1967-2002. They used Maximum

likelihood estimation method for analysis purpose. The conclusion of their study was that

floating exchange rate system could avoid the cost of these reserves. Ricardo. H., (1999)

examined the relationship between currency crises and exchange rate. The intent of his study

was the observation that modern economies have not yet been able to function without some

kind of money. The main variable of his study were currency crises and exchange rate. The

used data of 1958-1998. He used Reducing absorption relative to production method for

analysis purpose. They finally concluded that a hard peg exchange rate system, like a




currency board, may require a substantial war chest of international reserves. It may seem

that a floating exchange rate system could avoid the cost of these reserves, but this

conclusion would be too simple. The studies on our topic are very few in numbers that have

been conducted ever before. There are some studies on this topic but they could not reflect

the right reasons of currency devaluation in Pakistan and these studies are also based on the

old pattern and reason. They give some reasons of devaluation that are not much logical and

enough. In our study there are the major and logical reasons of currency devaluation in

Pakistan that are directly affecting the value of the currency of Pakistan.

1.2 Purpose Statement

The purpose of this proposed study is to examine the factors that affect Currency

Devaluation. The independent variables of the study includes deficit financing, economic

instability and money supply. However, currency devaluation is the dependent variable in the

study. Quantitative research approach will be used for data collection and analysis. The

dependent variable currency devaluation of the study will be generally define as reduction in

the value of a currency with respect to those goods, services or other monetary units with

which that currency can be exchanged.

1.3 Research Objective

To examine the impact of Deficit Financing on Currency Devaluation.

To examine the impact of Economic Instability on Currency Devaluation.

To examine the impact of Money Supply on Currency Devaluation.

1.4 Significance of Study

The rupee was first devalued in 1950 in response to a similar move by India. Later in 1972,

Z.A. Bhutto’s government massively devalued the rupee by 133%. The rupee was further

devalued in early 1980s during General Zia regime. Moeen Qureshi’s caretaker government

in 1993 also devalued the rupee by 7%. No Study has been conduct on currency devaluation

more efficiently before. Since 2008, we’ve seen a 25-30% devaluation in Sterling and we are

left with only very weak recovery, cost push inflation and a surprisingly large current account

deficit. This suggests that the argument of imported inflation may not be valid in case of

Pakistan, which means that there is no evidence of a significant pass-through of rupee

depreciations to consumer prices in the short-run. This finding is consistent with recent

theoretical analysis that suggests that a weak short-run association between exchange rate

changes and inflation. Furthermore the unique findings of the study may also help to

understand the relation between currency devaluation and inflation. We have use quantitative

method which has not been used in this area and hence this will be a significant

methodological advancement. We have tell that Exports become cheaper, more competitive

to foreign buyers. Therefore, this provides a boost for domestic demand. It reduces the

purchasing power of citizens abroad e.g. more expensive to holiday in Europe. However the

present study will aim to provide guideline to the economy to come up with the policies which

would enable them to attract and retain their top level. This study focus that the devaluation is

a measure to correct a fundamental disequilibrium in country balance of payment. Reluctance

to adjust the exchange rate in downward direction is due to its possible contractionary impact

on output and employment, re-distribution of income from wages earner to property owners,

cost-push inflationary pressure and the initial favorable effect on the balance of payment. . All

of the above will eventually reserve through a process of domestic inflation and larger

imports. When quantitative controls on imports duties are reduced along with the devaluation,

imports and exports are not particularly sensitive to price changes especially in the short run.

This is particularly applicable in the case of UDC’s whose imports are often consist of


http://en.wikipedia.org/wiki/Currency



essential capital goods, intermediate inputs including fuel and fertilizer and sometimes basic

consumer goods like food grains, edible oils etc. There is little scope for cutting down these

imports.

1.5 Hypothesis

There is a significance relationship between Deficit Financing on Currency

Devaluation.

There is a significance relationship between Economic Instability on Currency

Devaluation.

There is a significance relationship between Money Supply on Currency Devaluation.

1.6 Literature review

Baig, Taimur & Goldfajn, (1999) examine the relationship between exports and currency

devaluation. The main purpose of this study is to describe the effects of exports on currency

devaluation and inadequate supervision of banking sector. The main variables of this study

are currency devaluation and exports of a country. They collected data from 1978-1998. They

used Ordinary least square method for analysis. They finally concluded the central role of the

financial sector has led to a reassessment of the optimal pace of financial liberalization, due

to the necessity of setting up adequate supervisory and regulatory mechanism and being

able to enforce the as preconditions for the removal of obstacles to international borrowing

and lending.

Obstfeld, M. & Rogoff, K. (2013) examined the relationship between exchange rate and

currency devaluation. Their study focuses on flexible prices, preferences, technology, and

market structure, individual maximization, comparing steady state & exchange rate dynamics.

Currency devaluation is their dependent variable and exchange rate is their independent

variable. They took data of 1982-2012. They used weighted average method for analysis.

The key findings of theirs study is to use essentially static approach in offering a framework

that simultaneously handles current-account and exchange rate issues, as well as the

dynamic repercussions of fiscal shifts.

Sidney, S. A. (2009), examine the relationship between expenditure and real income. The

intent of his study the elasticity’s Approach, the income-absorption approach, effect of

devaluation on income, international monetary fund staff papers, direct effect on absorption

and devaluation compared with other methods. He worked on expenditure and real income.

He used data of 1983-2008. He used Reducing absorption relative to production method for

analysis purpose. At the last he come to know that most fruitful approach to the general

problem of obtaining a satisfactory foreign balance, and in particular of appraising the effects

on the foreign balance of a devaluation, is via the analysis of the income-absorption

relationship.

Aizenman, Joshua and Jinjarak, Y. (2009) examine the relationship between interst rates and

currency devaluation. The purpose of theirs study is the interaction among the Fed’s

monetary stance, global real interest rates, credit market distortions, financial innovation

created the toxic mix of conditions & exchange rate and other economic policies. They

variables on which they focus are interest rates and currency devaluation. They used data of

1978-2008. They used t-test for analysis purpose. The finding of their study was that risks to

financial stability had become less pronounced since late 2003 in part because of strength in

the real economy.

Guillermo, A. C. & Frederic, S. M. (2003) examine the relationship between domestic output

and sticky prices. The focus of their study was on the standard theory of choosing an




exchange rate regime, the Mendel challenge, the realities of emerging market economies, the

ability to have domestic monetary policy & reducing inflation. They variables were domestic

output and sticky prices. They used data of 1967-2002. They used Maximum likelihood

estimation method for analysis purpose. The conclusion of their study was that floating

exchange rate system could avoid the cost of these reserves.

Banerjee, A. (2000) examine the relationship between interest rate and foreign debts. The

core objective of his study was to focus on the monetary sector, output, entrepreneur’ debt,

currency crises and monetary policy. The variables on which he focused were interest rates

and foreign debts. They used data of 1979-2009. He used Malmquist Index method for

analysis purpose. He found that if monetary policy is expected to be more permanent, there

will be a larger exchange rate effect, making an interest rate increase more desirable.

Johnson, G. H. (1977) examine the relationship between monetary approach and balance of

payment. The aim of his study was alternative approaches to devaluation theory, policy

implication and some developments of the monetary approach. His main variables were

monetary approach and balance of payment. He used data of 1957-1976. For analysis they

used the elasticity’s and the Keynesian multiplier method. He concluded the empirical study

of the determination and control of the world money supply under fixed exchange rates,

which reaches the important general conclusions that the growth of the world money supply

in the study period was influenced in an important and predictable way by the growth of world

reserve money.

Rogoff, K. (1999) examine the relationship between financial instability and currency

devaluation. The main objective of his study was an international financial crises manage,

chinks in the theoretical case for a domestic lender of last resort, an international bankruptcy

court & a global financial regulator. His variables were financial instability and currency

devaluation. He used data of 1973-1998. T-test has been applied to test the data. He found

that most of the grand schemes considered here fall into three categories, those that are

politically infeasible given the absence of a supranational legal authority and those that would

raise costs to lenders or add protections for borrowers.

Mccombie, J. D. (2011) examine the growth rate and currency devaluation. His study focuses

on the growth rates of countries are interlinked, the ineffectiveness of floating exchange

rates, EMU & common currency areas and the balance-of-payments constraint. He worked

on growth rate and lcurrency devaluation variables. He used data of 1970-2010. Supply

oriented and demand oriented method had been used for analysis purpose. At the last he

come to know that if a major country reduces its growth for policy reasons, it will induce a

slower rate of growth of the other countries because of the balance-of- payments constraint.

Salant, W. (2001) examine the relationship between dollar rate and currency devaluation.

The main of his study was to describe the Dutch disease and protectionism, the international

dollar standard & financial fragility. Dollar rate and currency devaluation were their variable

on which he worked. He used data of 1975-2000. He used auto-regressive distributed lag

method for analysis. He finally conclude that if the American current account deficit remains

high, capital flight from the dollar, higher U.S. interest, and a weak dollar should now be with

us or eventually will be. But a sustained flight from the dollar to force a correction in the

American current account deficit would also undermine the international dollar standard.

Robert E. H. (1982) examined the relationship between inflation and currency devaluation.

The purpose of his study was to check the effect the rapid rise in the "high-powered" money

supply in the months and years after the rapid inflation had ended, the immediacy with which

the price level and suddenly stabilized. His variables were unemployment and currency

devaluation. He used data of 1951-1981. He used correlation and regression method. The




finding of their study was that if we make strategies to avoid inflation and other natural crises

we can control money supply due to which currency devaluation can be reduced.

Bardhan, P. (1970) examined the relationship between issuance of notes and currency

devaluation. The purpose of his study was to use of infant industry protection to expand

market share, the problems resulting from natural resource discoveries and the long run

effects of monetary policy. He worked on issuance of notes and currency devaluation. He

used data of 1949-1969. Multiple regression method had been used for analysis. The key

finding of his study was that the use of infant industry protection to expand market share, the

problems resulting from natural resource discoveries, and the long run effects of monetary

policy. Yet we were able to show that alarmist concerns in each case can be given their most

plausible grounding by a model in which dynamic economies of scale play a crucial role.

Ricardo. H., (1999) examined the relationship between currency crises and exchange rate.

The intent of his study was the observation that modern economies have not yet been able to

function without some kind of money. The main variable of his study were currency crises

and exchange rate. The used data of 1958-1998. He used Reducing absorption relative to

production method for analysis purpose. They finally concluded that a hard peg exchange

rate system, like a currency board, may require a substantial war chest of international

reserves. It may seem that a floating exchange rate system could avoid the cost of these

reserves, but this conclusion would be too simple.

Hubbard, G. R. (1991) examined the relationship between monetary expansion and

performance of countries. The main objective of this study was to analyze that the monetary

expansion was a reason for the better performance of countries. His study’s variables were

monetary expansion and performance of country. They used data of 1965-1990. He use

weighted average method for analysis. The finding of his study was that the monetary and

financial arrangements in the interwar period were badly flawed and were a major source of

the fall in real output. Banking panics were one mechanism through which deflation had its

effects on real output, and panics in the United States may have contributed to the severity of

the world deflation.

Shambaugh, C. J. (2008) examined the relationship between financial instability and currency

devaluation. The intent of his study was to test the financial instability and country

development and role of currency devaluation in financial instability. Financial instability and

currency devaluation were his variables. He used data of 1967-2007. He used Tornqvist-Thiel

index number methodology for analysis. The key finding of his study was that the recent and

rapid accumulation of reserves by emerging markets with pegged or quasi-pegged exchange

rates is often considered inexplicable. The practice of emerging central banks seems far

ahead of any coherent theory—and hence appears to be an economic puzzle, if not a policy

problem.




1.7 Theoretical Model

Currency Devaluation

Deficit Financing

Economic Instability

Money Supply

1.8 Research Methodology

Paradigm is a theory or a group of ideas about how something should be done, made, or

thought about. There are three types of paradigm: Positivism, Interepritivism and Pragmatism

but in our research we will use positivism paradigm because we are examining cause and

effect relationship in our proposed model and the second reason of using positivism

paradigm is that many researches are already available based on the interpretivism and

pragmatism paradigm. We are using quantitative research approach in this research.

There are two types of data collection method primary and secondary. Primary data is that is

first time is collected and not easily available at somewhere where as the secondary data is

easily available at somewhere and it has already been collected by someone. In our studies

secondary data collection method is being used because past data is being used in our

research. We are applying different kinds of test e.g. regression and correlation because

regression clearly defines the cause and effects between the variable and correlation defines

that how much they are affecting each other.

1.9 Limitations and delimitation

We are using secondary data.

We are using quantitative data.

We have collected our data for research from WDI.

We collect a much narrower and sometimes superficial dataset.

Our results are limited as they provide numerical descriptions rather than detailed

narrative and generally provide less elaborate accounts of human perception.

In addition preset answers will not necessarily reflect how people really feel about a

subject and in some cases might just be the closest match.




1.10 Ethical considerations

Ethical consideration is an accumulation of values and principles that address questions of

what is good or bad in human affairs. Ethics searches for reasons for acting or refraining from

acting; for approvers not approving conduct; for believing or denying something about

virtuous or vicious conduct or good or evil rules. Ethics is a major branch of philosophy that

has occupied great minds for many centuries. This study will help to identify core ethical

principles related to currency devaluation. In our studies we are giving references where we

are taking data from other researches. We are using quantitative method for this. In our

research we ask questions to the respondent which are according to their expectations. Our

focus is to discuss intellectual property very frankly so that it would not hurt, we try to

maintain anonymity and confidentiality. In our research we are not pressurizing our

respondent as we avoid to ask those questions in which the respondent don’t feel good to

answer. It is sometimes assumed that secondary analysis raises few ethical considerations,

but that view is rarely taken by ethics committees, and so it is worth spending some time

thinking about the specific ethical considerations of our planned research. Our

considerations are depend on the nature of the data set (quantitative data sets), as we

conduct historical and archival research. The consideration of our studies is that we

maximizes possible benefits and minimize possible harms.

1.11 References

Baig, Taimur, and Goldfajn, I. (1999). Financial Market Contagion in the Asian Crisis.

International Monetary Fund Staff Papers, 46(2), 167-95.

Obstfeld, M. & Rogoff, K. (2013). Exchange Rate Dynamics Redux, Journal of Political

Economy, Vol. 103(3), 624-660

Sidney, S. A. (2009). Effects of a Devaluation on a Trade Balance, international Monetary

Fund, Vol. 2(2), 263-278

Aizenman, Joshua and Jinjarak, Y. (2009). “Current Account Patterns and National Real

Estate Markets,” Journal of Urban Economics 66 (2), 75-89.

Guillermo, A. C. & Frederic, S. M. (2003). The Mirage of Exchange Rate Regimes for

Emerging Market Countries, The Journal of Economic Perspectives, Vol. 17(4), page 99-118.

Banerjee, A. (2000). A simple model of monetary policy and currency crises, European

Economic Review 44, 728-738

JOHNS0N, G. H. (1977). The monetary approach to the balance of payments, Journal of

International Economics 7, 251-268.

Rogoff, K. (1999). International Institutions for Reducing Global Financial Instability, the

Journal of Economic Perspectives, Vol. 13(4), 21-42.

Mccombie, J. D. (2011). Economic Growth and the Balance-of-Payments Constraint, the

PSL Quarterly Review, vol. 64, No 259

Salant, W. (2001). “The Dollar and World Liquidity A Minority View”, The Economist, vol. 5(3),

526-29.

Robert E. H. (1982). Causes and Effects of Currency Devaluation, Volume ISBN: 0-226-

31323-9, pp 41 – 98

Bardhan, P. (1970). Economic growth, development, and foreign trade, Journal of

International Economics 18, 83-100.




Ricardo. H., (1999) "Should There be 5 Currencies or 103", Foreign Policy Vol. 7, 63-79.

Hubbard, G. R. (1991). Financial Markets and Financial Crises, International Finance

Research, Vol. 2(4), 221-236

Shambaugh, C. J. (2008). Financial Stability, the Trilemma, and International Reserves,

Effects of Currency Crises, Vol. 6(2), 122-151

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