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Money Supply and Exchange Rate Variations in Sri Lanka in the Independent Float Regime—A Time Domain Study

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  • Biswajit Maitra

    (Biswajit Maitra is Assistant Professor of Economics, Surya Sen College, affiliated to North Bengal University, India. Email: b_moitra@yahoo.com)

Abstract

The monetary model of exchange rate determination holds that cheap monetary policy of the home country leads to depreciation of the national currency. The study attempts to enquire if the rupee/dollar exchange rate variation as observed in the period of independent float regime in Sri Lanka had any link with the domestic money supply. The study of cointegration testifies that exchange rate and M2 money supply are cointegrated at level. Causality from the VEC model reveals that seven and nine month lagged money supplies cause depreciation of exchange rate. The intervention analysis through the impulse response functions and variance decomposition shows that in the forecast periods ahead there is an increasing role of money supply in the variation of exchange rate.

Suggested Citation

  • Biswajit Maitra, 2010. "Money Supply and Exchange Rate Variations in Sri Lanka in the Independent Float Regime—A Time Domain Study," South Asia Economic Journal, Institute of Policy Studies of Sri Lanka, vol. 11(1), pages 111-129, March.
    • Handle: RePEc:sae:soueco:v:11:y:2010:i:1:p:111-129
    DOI: 10.1177/139156141001100107
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    References listed on IDEAS

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    Cited by:

    1. 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.

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    More about this item

    Keywords

    Exchange Rate; Cointegration; Granger Causality; Independent Float; Mundell-Fleming Model; VEC; JEL: F31; JEL: E51; JEL: C32;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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