Exchange Rate and Monetary Fundamentals: Long Run Relationship Revisited

Authors

  • 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

DOI:

https://doi.org/10.2298/PAN1501033B

Keywords:

Monetary approach, Exchange rate determination, 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. 

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Published

2015-10-10

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. https://doi.org/10.2298/PAN1501033B

Issue

Vol. 62 No. 1 (2015)

Section

Original scientific paper