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.
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