Determining the Nominal Exchange Rate in Sri Lanka: An Application of The Lagrange Multiplier Structural Break Unit Root Test and The Ardl Co-Integration

Iwanthika Rajakaruna, Nelson Perera

Abstract


Bihari There is a vast literature on the impact of exchange rate on developing countries’ economies. This paper studies the determinants of nominal exchange rate fluctuations in Sri Lanka. It employs recent secondary macroeconomics monthly time series data (2011:01-2018:07) and tests the ARDL co-integration approach with structural break LM unit root test, which was introduced by Lee and Strazicich in 2013. Results of the bound test show that the nominal exchange rate has a long-term relationship with its determinants. Further, our empirical findings suggest that a strong depreciating link exists between the nominal exchange rate and money supply in Sri Lanka during the sample period. Outcomes are signals that identify new lessons for policy-makers to implement consistent foreign exchange policies. Doing so must consider both monetary and fiscal policy simultaneously.


Keywords


Exchange rate determination; LM unit root test; ARDL approach; Sri Lanka; JEL classification; F31; B27

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References


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DOI: https://doi.org/10.33687/jsas.008.02.3301

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