The impact of changes in monetary aggregates on exchange rate volatility in a developing country: Do structural breaks matter?

- This paper investigates the nexus between monetary aggregates and exchange rates.
- The analysis is conducted using ARCH/GARCH methodology.
- We test and account for endogenous structural breaks in monetary aggregates.
- Results support theoretical predictions of money supply-exchange rate nexus.

Theoretical models of exchange rate determination predict that increases in monetary aggregates lead to depreciation. However, several empirical studies do find exchange rate response anomalies to innovations in monetary policy. In this paper, we show that accounting for major structural break points in monetary variables leads to empirical results that are statistically consistent with predictions from theoretical monetary models of exchange rate determination.