Unanticipated Monetary Shocks and Exchange Rate Variations in Sri Lanka
Indian Economic Journal, Vol. 58, No. 1, pp. 112-133, April-June 2010
Posted: 14 Jan 2012
Date Written: January 12, 2012
Abstract
This paper examines how unanticipated monetary shocks cause variations in exchange rate in Sri Lanka under the independent float regime. The study addresses this issue under both the rational and adaptive expectations framework. GARCH (generalised autoregressive conditional heteroskedasticity) (1, 2) based minimum mean squared error (MSE) forecast give forth the series of anticipated and unanticipated money supply. Exchange rate series, on the other hand, followed martingale stochastic process. The study also found the evidence that in the variations of Sri Lankan currency, unanticipated monetary shocks assure significant role.
Keywords: unanticipated monetary shock, rational expectation, adaptive expectations, exchange rate
JEL Classification: F31, E52, C32
Suggested Citation: Suggested Citation