Abstract

This study investigates whether short run movements in the exchange rates could be predicted by the past history of GDP, consumer price index, imports, exchange rates themselves and government expenditure. Secondly, the study investigates if there are stable long run equilibrium relationships among the variables. Using quarterly data spanning twenty four years, the techniques of cointegration, vector error correction mechanism, granger causality test, variance decomposition and impulse response functions have been used to analyze the data. The study reveals that there are significant long run equilibrium relationships among the variables. It also reveals that government expenditure is significant in forecasting the exchange rate movements. In addition, the past history of the exchange rates has dominant effects in forecasting the exchange rates. It is recommended that government expenditure should be controlled to reduce drastic fluctuations in the exchange rate in the short run.

 

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