THE TIME SERIES ANALYSIS: THE BEHAVIOR OF THE EXCHANGE RATE IN SRI LANKA

Abstract

The objective of this study is to determine a model to forecast the Exchange rate and study the recent behavior of the Exchange rate in Sri Lanka. In order to achieve the above objective the Autoregressive Integrated Moving Average (ARIMA) model was used and suitability of the model was checked using T-tests and residuals analysis. This study was carried using secondary data, which had been collected from annul reports and other publications published by the Central Bank of Sri Lanka. The study confirms that Real Effective Exchange Rate and Nominal Effective Exchange Rate are decreasing at reducing rate with some fluctuations over time. The study also indicates that Nominal Exchange Rate is increasing at little bit rate, but that rate is ignorable. At present, the structure of the financial market is very complicated. Therefore, the Exchange rate forecasting has become a very difficult task. However knowledge about Exchange rates will be an added advantage to handle the large-scale exports and imports industries more effectively and to develop the most prudent monetary and fiscal policies for the country.

Keywords: ARIMA Model, Nominal Effective Exchange Rate, Nominal Exchange Rate, Real Effective Exchange Rate

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