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Monetary Interpretation of Exchange Rates in the South Asian Countries

Author

Listed:
  • Yunus , Mohammad

    (Senior Research Fellow, Bangladesh Institute of Development Studies (BIDS))

Abstract

This paper attempts to analyse the extent of influence of the monetary factors in determining exchange rate in the developing countries. In doing so, it presents empirical evidence on the monetary model of exchange rate determination for five South Asian countries over the post-Bretton Woods period using the Johansen multivariate cointegration technique. It finds supportive evidence of long-run relationships between the official and the market exchange rates and the so-called fundamentals. This implies that market fundamentals accounted for the substantial loss of the external values of the currencies over the period under consideration. Therefore, a prudent pursuit of monetary policy is a prerequisite for maintaining stable exchange rate in the long-run in these countries. However, statistical testing of popular restrictions resoundingly rejects the monetary model. Two conclusions are reached: the monetary model can still be a valid representation of the long-run behaviour of the exchange rates; and that the restrictions imposed on the model are in general not valid in view of complex dynamics in the exchange rate determination process.

Suggested Citation

  • Yunus , Mohammad, 2001. "Monetary Interpretation of Exchange Rates in the South Asian Countries," Bangladesh Development Studies, Bangladesh Institute of Development Studies (BIDS), vol. 27(1), pages 73-103, March.
    • Handle: RePEc:ris:badest:0411
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    Citations

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    Cited by:

    1. Rahman, Pk. Md. Motiur & Yamagata, Tatsufumi, 2004. "Business Cycles and Seasonal Cycles in Bangladesh," IDE Discussion Papers 1, Institute of Developing Economies, Japan External Trade Organization(JETRO).
    2. Works, Richard Floyd, 2016. "Econometric modeling of exchange rate determinants by market classification: An empirical analysis of Japan and South Korea using the sticky-price monetary theory," MPRA Paper 76382, University Library of Munich, Germany.
    3. Muhammad Arshad Khan & Saima Nawaz, 2018. "Does Pak-Rupee Exchange Rate Respond to Monetary Fundamentals? A Structural Analysis," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 57(2), pages 175-202.
    4. Bhavish SHARMA, 2020. "Monetary policy and exchange rate pass-through in India," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(4(625), W), pages 275-288, Winter.

    More about this item

    Keywords

    Foreign exchange rates; Floating exchange rates; Empirical evidence; Purchasing power parity;
    All these keywords.

    JEL classification:

    • A12 - General Economics and Teaching - - General Economics - - - Relation of Economics to Other Disciplines

    Statistics

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