Exchange Rate and Monetary Fundamentals: Long Run Relationship Revisited

  • Niyati Bhanja University of Petroleum and Energy Studies, Department of Economics and International Business, Uttarakhand, India
  • Arif Billah Dar Institute of Management and Technology, Department of Economic Environment and Strategy, Uttar Pradesh, India
  • Aviral Kumar Tiwari Faculty of Management, Institute of Chartered Financial Analysts of India (ICFAI) Business School - A Constituent of ICFAI Foundation for Higher Education, Andhra Pradesh, India

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. 

How to Cite
Bhanja N., Dar A.B., & Tiwari A.K. (2015). Exchange Rate and Monetary Fundamentals: Long Run Relationship Revisited. Panoeconomicus, 62(1), 33-54. doi:10.2298/PAN1501033B
Section
Original scientific paper