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Exchange Rate and Monetary Fundamentals: Long Run Relationship Revisited

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  • Niyati Bhanja
  • Arif Billah Dar
  • Aviral Kumar Tiwari

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.

Suggested Citation

  • Niyati Bhanja & Arif Billah Dar & Aviral Kumar Tiwari, 2015. "Exchange Rate and Monetary Fundamentals: Long Run Relationship Revisited," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 62(1), pages 33-54.
    • Handle: RePEc:voj:journl:v:62:y:2015:i:1:p:33-54:id:41
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    More about this item

    Keywords

    Monetary approach; Exchange rate determination; India;
    All these keywords.

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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