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Exchange rate sensitivity influencing the economy: The case of Sri Lanka

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  • Presant Thevakumar
  • Ruwan Jayathilaka

Abstract

This particular study investigated the possibility of modelling the exchange rate volatility of the USD/LKR currency pair and analysed whether macroeconomic factors influence the exchange rate. To model the exchange rate volatility, a combination of Autoregressive integrated moving average (ARIMA) and generalized autoregressive conditional heteroskedasticity (GARCH) family models were used. The ARDL model was utilized to explore the presence of dynamic short-run and long-run relationships between the exchange rate and macroeconomic variables. The ARDL model empirical findings inferred that a long-run relationship does not exist between any of the examined macroeconomic variables and the exchange rate. In contrast, a short-run relationship exists between exchange rate lag one, exchange rate lag two, inflation, and merchandising trade balance. Thereby, as per the findings improving the merchandising trade balance and minimising inflation would minimise volatility in the exchange rate. All stakeholders who are exposed to foreign exchange volatility including policymakers, importers, exporters, and financial institutions can benefit from this study’s findings. This research focused on the most recent economic phenomena of Sri Lanka and used Gross official reserve as a variable that was rarely used in existing literature on Sri Lankan exchange rate.

Suggested Citation

  • Presant Thevakumar & Ruwan Jayathilaka, 2022. "Exchange rate sensitivity influencing the economy: The case of Sri Lanka," PLOS ONE, Public Library of Science, vol. 17(6), pages 1-17, June.
    • Handle: RePEc:plo:pone00:0269538
    DOI: 10.1371/journal.pone.0269538
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    References listed on IDEAS

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    3. Ayesh Ariyasinghe & N. S. Cooray, 2021. "The Nexus Of Foreign Reserves, Exchange Rate And Inflation: Recent Empirical Evidence From Sri Lanka," South Asia Economic Journal, Institute of Policy Studies of Sri Lanka, vol. 22(1), pages 29-72, March.
    4. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
    5. Mirzosaid Sultonov, 2011. "Impact of remittances on the real effective exchange rate of tajikistan's national currency," Economics Bulletin, AccessEcon, vol. 31(4), pages 1-57.
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