Using various cointegration tests, the paper examines the validity of the monetary model as a theory of long-run equilibrium condition for the exchange rate of a developing economy experiencing chronic and at times accelerating inflation. Contrary to the findings of some earlier research, this study offers no evidence of long-run equilibrium relationship among the variables of the monetary model. It does not also provide any evidence of structural shift in the relationship. These results suggest that the monetary model is not a valid framework for analyzing the long-run movements of the rupee-dollar exchange rate. The failure of the model, despite some evidence of long-run relative PPP, may be attributed to the absence of monetary equilibrium condition.

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