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The use of the ARDL approach in estimating virtual exchange rates in India

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Subrata Ghatak, Jalal U. Siddiki
Abstract

This paper applies the autoregressive distributed lag approach to cointegration analysis in estimating the 'virtual exchange rate' (VER) in India. The VER would have prevailed if the unconstrained import demand were equal to the constraint imposed due to foreign exchange rationing and the VER is used to approximate the 'price' of rationed foreign exchange reserves. We highlight the shortcomings of the existing literature in approximating equilibrium exchange rates in a less developed country such as India and propose the VER approach for equilibrium rates, which uses information from an estimated structural model. In this relationship, black market real exchange rate (E U ) is a dependent variable and real official exchange rates (E O ), the ratio of the foreign (r*) to the domestic (r) interest rate (I), and official forex reserves (Q) are explanatory variables. In our estimation, the VERs are higher than E O by about 10% in the short-run and 16% in the long-run.

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Article provided by Taylor and Francis Journals in its journal Journal of Applied Statistics.

Volume (Year): 28 (2001)
Issue (Month): 5 (July)
Pages: 573-583
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Handle: RePEc:taf:japsta:v:28:y:2001:i:5:p:573-583

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  1. Phylaktis, Kate, 1991. "The black market for dollars in Chile," Journal of Development Economics, Elsevier, vol. 37(1-2), pages 155-172, November. [Downloadable!] (restricted)
  2. Pierre-Richard Agénor, 1990. "Stabilization Policies in Developing Countries with a Parallel Market for Foreign Exchange: A Formal Framework," IMF Working Papers 90/16, International Monetary Fund.
  3. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March. [Downloadable!] (restricted)
  4. Pesaran, M.H. & Shin, Y., 1995. "An Autoregressive Distributed Lag Modelling Approach to Cointegration Analysis," Cambridge Working Papers in Economics 9514, Faculty of Economics, University of Cambridge.
  5. Pesaran, M. H. & Shin, Y. & Smith, R. J., 1996. "Testing for the 'Existence of a Long-run Relationship'," Cambridge Working Papers in Economics 9622, Faculty of Economics, University of Cambridge.
  6. Baghestani, Hamid & Noer, John, 1993. "Cointegration analysis of the black market and official exchange rates in India," Journal of Macroeconomics, Elsevier, vol. 15(4), pages 709-721. [Downloadable!] (restricted)
  7. Sanjeev Gupta, 1980. "An application of the monetary approach to black market exchange rates," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 116(2), pages 235-252, June. [Downloadable!] (restricted)
  8. Dornbusch, Rudiger, et al, 1983. "The Black Market for Dollars in Brazil," The Quarterly Journal of Economics, MIT Press, vol. 98(1), pages 25-40, February. [Downloadable!] (restricted)
  9. Khan, Mohsin S. & Ostry, Jonathan D., 1992. "Response of the equilibrium real exchange rate to real disturbances in developing countries," World Development, Elsevier, vol. 20(9), pages 1325-1334, September. [Downloadable!] (restricted)
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  10. Charemza, Wojciech W., 1990. "Parallel markets, excess demand and virtual prices : An empirical approach," European Economic Review, Elsevier, vol. 34(2-3), pages 331-339, May. [Downloadable!] (restricted)
  11. Neary, J. P. & Roberts, K. W. S., 1980. "The theory of household behaviour under rationing," European Economic Review, Elsevier, vol. 13(1), pages 25-42, January. [Downloadable!] (restricted)
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  12. Jalal U. Siddiki, 2000. "Black market exchange rates in India: an empirical analysis," Empirical Economics, Springer, vol. 25(2), pages 297-313. [Downloadable!] (restricted)
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  1. Chien-Chung Nieh & Yu-Shan Wang, 2005. "ARDL Approach to the Exchange Rate Overshooting in Taiwan," Review of Quantitative Finance and Accounting, Springer, vol. 25(1), pages 55-71, August. [Downloadable!] (restricted)
  2. Min B. SHRESTHA & Khorshed CHOWDHURY, 2007. "Impact of Financial Liberalization on Welfare: Evidence from Nepal," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 7(1). [Downloadable!] (restricted)
  3. Sanidas, Elias & Jayanthakumaran, Kankesu, 2006. "The Consequences of Trade Liberalisation on the Australian Passenger Motor Vehicle Industry," Economics Working Papers wp06-01, School of Economics, University of Wollongong, NSW, Australia. [Downloadable!]
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