Email this article 
Hide
Show all
AN INVESTIGATION OF FACTORS AFFECTING EXCHANGE RATE FLUCTUATIONS IN SRI LANKA
Abstract
This article examines the factors that affect exchange rate fluctuations in Sri Lanka. The relevance of this article relies on how do the changes in Inflation, Interest Rates, Terms of Trade, Net Foreign Purchases (a proxy for Net Capital Inflows), Official Intervention and remittances affect the fluctuations in Sri Lanka’s Exchange Rate. The article is carried out with respect to three objectives, namely; examine the factors that affect exchange rate fluctuations, identify the relationship between the factors and the exchange rate fluctuations and investigate the impact of the factors that had on the exchange rate. Two different econometric models (Multiple Regression Model and VAR Model) have been used to analyses the results, with monthly data, for the period 2001:01 to 2010:12. Results obtained by Multiple Regression Model suggest that net official intervention is the most effective and significant determinant of exchange rate during the sample period. Inflation and net foreign purchases (as a proxy for Net Capital Inflows) are rendered to be less effective and non-significant determinants of the exchange rate. However, it can be seen that there is a direct link between the two determinants of net official intervention and net foreign purchases. A negative relationship exists between exchange rate and inflation, interest rate, remittances, and terms of trade, whereas a positive relationship exists between exchange rate and net foreign purchases. According to the estimation results of Vector Auto Regression net official intervention, net foreign purchases and call money rate cause the most of fluctuations in the exchange rate.
Keywords
References
Achsani, N. A., Fauzi, A., & Abdullah, P. (2010). The relationship between inflation and real exchange rate: comparative study between Asean+ 3, the EU and North America. European Journal of Economics, Finance and Administrative Sciences, 18, 1450-2275.
Alawattage, U. P. (2009). Exchange Rate, Competitiveness and Balance of Payment Performance. Staff Studies, 35(1), 63. doi: 10.4038/ss.v35i1.1234
Bahmani-Oskooee, M., & Hegerty, S. W. (2007). Exchange rate volatility and trade flows: a review article. Journal of Economic studies, 34(3), 211-255.
Bahmani‐Oskooee, M., & Hegerty, S. W. (2007). Exchange rate volatility and trade flows: a review article. Journal of Economic studies, 34(3), 211-255. doi: 10.1108/01443580710772777
Bayoumi, T., & Eichengreen, B. (1998). Exchange rate volatility and intervention: implications of the theory of optimum currency areas. Journal of International Economics, 45(2), 191-209. doi: 10.1016/s0022-1996(98)00032-4
Behera, H., Narasimhan, V., & Murty, K. N. (2008). Relationship between Exchange Rate Volatility and Central Bank Intervention. South Asia Economic Journal, 9(1), 69-84. doi: 10.1177/139156140700900103
Bhasin, V. K. (2004). Dynamic inter-links among the exchange rate, price level and terms of trade in a managed floating exchange rate system: The case of Ghana.
Bilson, J. F., & Marston, R. C. (1984). Exchange Rate Theory and Practice: University of Chicago Press.
Bilson, J. F. O. (1978). The Monetary Approach to the Exchange Rate: Some Empirical Evidence (La theorie monetaire du taux de change: preuves empiriques) (El enfoque monetario del tipo de cambio: Algunas pruebas empiricas). Staff Papers - International Monetary Fund, 25(1), 48. doi: 10.2307/3866655
Bjørnland, H. C. (2009). Monetary policy and exchange rate overshooting: Dornbusch was right after all. Journal of International Economics, 79(1), 64-77.
Canales Kriljenko, J. I., Karacadag, C., & Guimarães, R. P. (2003). Official Intervention in the Foreign Exchange Market: Elements of Best Practice. IMF Working Papers, 03(152), 1. doi: 10.5089/9781451857115.001
Cheung, Y.-W., Chinn, M. D., & Pascual, A. G. (2005). Empirical exchange rate models of the nineties: Are any fit to survive? Journal of international money and finance, 24(7), 1150-1175.
Drine, I., & Rault, C. (2003). On the Long-Run Determinants of Real Exchange Rates for Developing Countries: Evidence from Africa, Latin America and Asia. SSRN Electronic Journal. doi: 10.2139/ssrn.411620
Edwards, S. (1983). Floating Exchange Rates in Less-Developed Countries: A Monetary Analysis of the Peruvian Experience, 1950-54. Journal of Money, Credit and Banking, 15(1), 73-81.
Edwards, S. (1989). Real exchange rates, devaluation, and adjustment: exchange rate policy in developing countries: MIT press Cambridge, MA.
Edwards, S. (1996). Economic Policy and the Dynamics of Growth. Studios de Economic, 23(2), 135-155.
Edwards, S., & Magendzo, I. (2003). A Currency of One's Own? An Empirical Investigation on Dollarization and Independent Currency Unions: National Bureau of Economic Research.
Edwards, S., & Yeyati, E. L. (2003). Flexible Exchange Rates as Shock Absorbers: National Bureau of Economic Research.
Evans, M. D. D., & Lyons, R. K. (2002). Order Flow and Exchange Rate Dynamics. Journal of Political Economy, 110(1), 170-180. doi: 10.1086/324391
Ezirim, C. B., & Muoghalu, M. I. (2006). Exchange rate determination, foreign investment burden and external debt crisis in less-developed countries: Nigerian experience. International Journal of Business and Economics Perspectives, 1(1), 1-15.
Fan, M., & Lyons, R. K. Customer trades and extreme events in foreign exchange Monetary History, Exchange Rates and Financial Markets: Edward Elgar Publishing.
Francisco Nadal, De-Simone, & Razzes, W. A. (1999). Nominal exchange rates and interest rate differentials: IMF Working Paper.
Fry, M. J. (1976). A Monetary Approach to Afghanistan's Flexible Exchange Rate. Journal of Money, Credit and Banking, 8(2), 219. doi: 10.2307/1991742
Ghosh, A., Gulde, A.-M., Ostry, J., & Wolf, H. (1997). Does the Nominal Exchange Rate Regime Matter? : National Bureau of Economic Research.
Ghosh, A., & Rajan, R. S. (2007). How high is exchange rate pass-through in India? Has it changed over time? The Journal of International Trade & Economic Development, 16(3), 373-382. doi: 10.1080/09638190701526832
Goldfajn, I., & Olivares, G. (2001). Can flexible exchange rates still" work" in financially open economies? United Nations: G-24 Discussion Paper no 8.
Goldfajn, I., & Werlang, S. R. d. C. (2000). The Pass-Through from Depreciation to Inflation: A Panel Study. SSRN Electronic Journal. doi: 10.2139/ssrn.224277
Hakkio, C. S. (1986). Interest rates and exchange rates–What is the relationship. Economic Review(Nov), 33-43.
Harischandra, P. K. G. (2009). Monetary Policy and Inflation Performance: Evidence from Exchange Rate Regimes in Sri Lanka. Staff Studies, 37(1), 69. doi: 10.4038/ss.v37i1.1227
Harvey, J. T. (2001). Exchange Rate Theory and “the Fundamentals”. Journal of Post Keynesian Economics, 24(1), 3-15. doi: 10.1080/01603477.2001.11490311
Horne, J. (2004). Eight conjectures about exchange rates. Journal of Economic studies, 31(6), 524-548.
International Monetary, F. (2011). Determinants of Remittances: Evidence From tonga. IMF Working Papers, 11(18), 1. doi: 10.5089/9781455211975.001
Ito, T., & Krueger, A. O. (1999). Changes in Exchange Rates in Rapidly Developing Countries: University of Chicago Press.
Kandil, M. M. E. (2000). The asymmetric effects of exchange rate fluctuations: Theory and evidence from developing countries: International Monetary Fund.
Kriljenko, M. J. I. C., & Habermeier, M. K. F. (2004). Structural factors affecting exchange rate volatility: A cross-section study: International Monetary Fund.
Lane, P. R. (2001). The new open economy macroeconomics: a survey. Journal of International Economics, 54(2), 235-266. doi: 10.1016/s0022-1996(00)00073-8
Li, Y., & Fang, X. (2010). A Reappraisal of the Exchange Rate Determination: A Liquidity Approach. International Business Research, 3(4), 50.
Mark, N. C., & Sul, D. (1999). Nominal Exchange Rates and Monetary Fundamentals: Evidence from a Small Post-Bretton Woods Panel. SSRN Electronic Journal. doi: 10.2139/ssrn.146188
Meese, R. A., & Rogoff, K. (1983). Empirical exchange rate models of the seventies. Journal of International Economics, 14(1-2), 3-24. doi: 10.1016/0022-1996(83)90017-x
Nwafor., F. C. (2005). The Naira-Dollar Exchange Rate Determination: A Monetary. Perspective. allahassee, FL., USA: Florida A&M University.
Obstfeld, M., & Rogoff, K. (1995). Exchange Rate Dynamics Redux. Journal of Political Economy, 103(3), 624-660. doi: 10.1086/261997
Oloyede, J. A. (1997). Current account monetary model and exchange rate behavior in LDCs: Evidence from Nigeria, Ghana and Gambia. African Journal of Economic Policy, 42(2), 47-65.
Peng, W., Shu, C., & Chow, K. (2003). The Yen Exchange Rate and Net Foreign Assets. Hong Kong Monetary Authority.
Rogoff, K. (1984). On the effects of sterilized intervention. Journal of Monetary Economics, 14(2), 133-150. doi: 10.1016/0304-3932(84)90056-4
Villavicencio, A. L., & J.L.R., B. (2006). The short and long-run determinants of the real exchange rate in Mexico. Spain: Department d’Economia Aplicada-Universitat Aut´onoma de Barcelona.
Wijesinghe, D. S. (1999). The Equilibrium Real Exchange Rate. The case of Sri Lanka, Staff Studies, Central Bank of Sri Lanka, 24(1).
Wijeweera, A., & Dollery, B. (2008). An econometric analysis of Sri Lankan monetary policy shocks and exchange rates. Global Business and Economics Review, 10(1), 58-67.
Wijeweera, A., & Dollery, B. (2008). An econometric analysis of Sri Lankan monetary policy shocks and exchange rates. Global Business and Economics Review, 10(1), 58. doi: 10.1504/gber.2008.016827
Wimalasuriya, S. M. (2009). Exchange Rate Pass-Through: To What Extent do Prices Change in Sri Lanka? Staff Studies, 37(1), 49. doi: 10.4038/ss.v37i1.1226
Woo, W. T. (1985). The monetary approach to exchange rate determination under rational expectations: The dollar-deutschmark rate. Journal of International Economics, 18(1-2), 1-16. doi: 10.1016/0022-1996(85)90002-9
Zakaria, M., & Ahmad, E. (2009). Productivity Shocks and Nominal Exchange Rate Variability: a Case Study of Pakistan. Journal of Economic Integration, 24(1), 175-189. doi: 10.11130/jei.2009.24.1.175
Refbacks
- There are currently no refbacks.
Copyright (c) 2017 Harshani Rajakaruna
This work is licensed under a Creative Commons Attribution 4.0 International License.
Journal of South Asian Studies
ISSN: 2307-4000 (Online), 2308-7846 (Print)
© EScience Press. All Rights Reserved.