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Exchange rate misalignment and economic growth in India

Author

Listed:
  • Vaseem Akram
  • Badri Narayan Rath

Abstract

Purpose - The purpose of the paper is to examine the impact of exchange rate misalignment on economic growth in India using annual data from 1980 to 2014. Design/methodology/approach - First, misalignment is measured, which is defined as the deviations of the actual real exchange rate (RER) from its equilibrium level. The equilibrium real exchange rate (ERER) is estimated using the auto-regressive distributed lag (ARDL) model by considering key macroeconomic fundamentals of the determinants of RER. Zivot and Andrews’ unit root with structural break is used to test the stationarity property of data. The impact of exchange rate misalignment on economic growth has been examined using ARDL and variance decomposition techniques. Findings - Our results find an overvaluation of the exchange rate till 2000, and thereafter, an undervaluation of the exchange rate prevails in India. Further, the result indicates that an increase in exchange rate misalignment leads to a decrease in economic growth and vice versa. Moreover, a positive misalignment (overvaluation) hurts the economic growth and a negative misalignment (undervaluation) promotes the economic growth. Research limitations/implications - From the policy perspective, the results highlight that India needs to maintain an appropriate exchange rate which can reduce the RER misalignment. It is better for the Reserve Bank of India (RBI)’s intervention to smoothen the fluctuations of the exchange rate to avoid the inefficiency in the allocation of resources. However, to minimize the RER misalignment, the intervention should be conducted only in the short run. Originality/value - The study contributes to the existing literature by estimating the exchange rate misalignment for India and its impact on economic growth.

Suggested Citation

  • Vaseem Akram & Badri Narayan Rath, 2017. "Exchange rate misalignment and economic growth in India," Journal of Financial Economic Policy, Emerald Group Publishing Limited, vol. 9(4), pages 414-434, November.
    • Handle: RePEc:eme:jfeppp:jfep-12-2016-0093
    DOI: 10.1108/JFEP-12-2016-0093
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    Citations

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    Cited by:

    1. Chandan Sharma, 2019. "Exchange rate volatility and exports from India: a commodity-level panel data analysis," Journal of Financial Economic Policy, Emerald Group Publishing Limited, vol. 12(1), pages 23-44, June.
    2. Mohammad Hassanzadeh & Shahla Mousavi, 2023. "Real effective exchange rate misalignment and currency crisis in Iran," Future Business Journal, Springer, vol. 9(1), pages 1-8, December.
    3. Abdul Jalil, 2021. "Exchange Rate Policy Must Seek Undervaluation!," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 60(1), pages 85-91.
    4. Zainab Jehan & Iffat Irshad, 2020. "Exchange Rate Misalignment and Economic Growth inPakistan: The Role of Financial Development," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 59(1), pages 81-99.

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