Exchange Rate and Monetary Fundamentals: Long Run Relationship Revisited

Niyati Bhanja (), Arif Dar and Aviral Tiwari

Panoeconomicus, 2015, vol. 62, issue 1, 33-54

Abstract: This study re-examines the long run validity of the monetary approach to exchange rate determination for India. In particular, the long run association of bilateral nominal exchange rate of Indian rupee vis-à-vis USD, Pound-sterling, Yen and Euro against the corresponding monetary fundamentals that the model underlines has been tested using Johansen-Juselius maximum likelihood framework and Gregory-Hansen co-integration approach. Irrespective of the exchange rates the study finds a co-integrating relationship among the variables using Johansen-Juselius maximum likelihood approach. The Gregory-Hansen co-integration method allows for one break determined endogenously in three specifications also confirms the long run relationship. Our results, hence, suggest that the monetary model is a valid theory of long run equilibrium condition for the rupee-dollar, rupee-pound, rupee-yen and rupee-euro exchange rates. Key words: Monetary approach, Exchange rate determination, India.JEL: F15, F31.

Keywords: Monetary approach; Exchange rate determination; India (search for similar items in EconPapers)
Date: 2015
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