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-?-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.
Exchange rate and monetary fundamentals: Long run relationship revisited
