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Macroeconomic Relationship in India: ARDL Evidence on Cointegration and Causality


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  • Inder Sekhar Yadav
  • M.A. Lagesh


The main objective of the paper is to estimate the dynamic interrelation among the macroeconomic variables viz., real output, money, price, interest rate and exchange rate using monthly data for India covering the period from 1991:1 to 2007:12 using ARDL approach to cointegration. The bounds test revealed that there exists a long-run relation between real output, money supply, interest rate and exchange rate when the price variable was the dependent variable. Also, a long-run relationship between real output, money supply, price and interest rate was found when exchange rate was the dependent variable. However, reverse cointegration relationships were not noticed when the real output, money supply and interest rate were the dependent variables. The short-run causality found no evidence of causality between real output and money and a unidirectional causality running from price and interest rate to real output was found. The exchange rate was found independent to the changes in real output. The exchange rate and price were found to be independent to changes in money. Further, it was noticed that the price is caused by output, money, interest rate and exchange rate. The causality was found to be neutral from output, money, price, and exchange rate on interest rate. Finally, it was found that output, money, price and interest rate has no effect on exchange rate in the short-run.

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Article provided by The Indian Econometric Society in its journal Journal of Quantitative Economics.

Volume (Year): 9 (2011)
Issue (Month): 1 ()
Pages: 156-168

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Handle: RePEc:jqe:jqenew:v:9:y:2011:i:1:p:156-168

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Postal: Managing Editor, Journal of Quantitative Economics, Indira Gandhi Institute of Development Research (IGIDR), Gen. A.K. Vaidya Marg, Goregaon (E), Mumbai 400 065 , INDIA

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  1. Khundrakpam, Jeevan K. & Goyal, Rajan, 2009. "Is the Government Deficit in India Still Relevant for Stabilisation?," MPRA Paper 50905, University Library of Munich, Germany.
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Cited by:
  1. P., Srinivasan & M., Kalaivani, 2013. "On the Temporal Causal Relationship between Macroeconomic Variables: Empirical Evidence from India," MPRA Paper 46803, University Library of Munich, Germany.


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