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Economic reforms and exchange rate pass-through to domestic prices in India

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  • Jeevan K Khundrakpam

Abstract

This paper examines the behaviour of exchange rate pass-through to domestic prices in India during the post-economic reforms initiated since the major devaluation of July 1991. It observes that there is no clear-cut evidence of a fall in exchange rate pass-through to domestic prices. Further, there is asymmetry in pass-through between appreciation and depreciation, and between sizes of the exchange rate change. Based on the empirical evidence provided in the literature, the paper conjectures that reductions in import tariffs, the removal of trade restrictions, the increased import penetration ratio and openness of the economy and the change in the composition of imports following the economic liberalisation could have transitorily negated the impact of lower inflation on pass-through. Part of the non-decline in long-run pass-through is due to a rise in inflation persistence. This could follow from the dismantling of price controls in an environment of periodic spurts in inflation around a non-declining inflationary trend, combined with a rise in the government deficit, which has a nexus with inflation in India.

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Bibliographic Info

Paper provided by Bank for International Settlements in its series BIS Working Papers with number 225.

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Length: 35 pages
Date of creation: Feb 2007
Date of revision:
Handle: RePEc:bis:biswps:225

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Keywords: pass-through; prices; exchange rate;

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References

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  1. Helena Marques & Sushanta Mallick, 2004. "Sectoral Exchange Rate Pass-through: A Tale of Two Policy Regimes in India," Discussion Paper Series, Department of Economics, Loughborough University 2004_12, Department of Economics, Loughborough University, revised Mar 2004.
  2. J. McCarthy, 1999. "Pass-through of exchange rates and import prices to domestic inflation in some industrialised economies," BIS Working Papers 79, Bank for International Settlements.
  3. Otani, Akira & Shiratsuka, Shigenori & Shirota, Toyoichiro, 2003. "The Decline in the Exchange Rate Pass-Through: Evidence from Japanese Import Prices," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, Institute for Monetary and Economic Studies, Bank of Japan, vol. 21(3), pages 53-81, October.
  4. Betts, Caroline & Devereux, Michael B., 1996. "The exchange rate in a model of pricing-to-market," European Economic Review, Elsevier, Elsevier, vol. 40(3-5), pages 1007-1021, April.
  5. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "Exchange Rate Dynamics Redux," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1131, C.E.P.R. Discussion Papers.
  6. Giovanni P. Olivei, 2002. "Exchange rates and the prices of manufacturing products imported into the United States," New England Economic Review, Federal Reserve Bank of Boston, Federal Reserve Bank of Boston, issue Q 1, pages 3 - 18.
  7. Jeffrey Frankel & David Parsley & Shang-Jin Wei, 2012. "Slow Pass-through Around the World: A New Import for Developing Countries?," Open Economies Review, Springer, Springer, vol. 23(2), pages 213-251, April.
  8. Gregory, Allan W. & Hansen, Bruce E., 1996. "Residual-based tests for cointegration in models with regime shifts," Journal of Econometrics, Elsevier, Elsevier, vol. 70(1), pages 99-126, January.
  9. Jeannine Bailliu & Eiji Fujii, 2004. "Exchange Rate Pass-Through and the Inflation Environment in Industrialized Countries: An Empirical Investigation," Working Papers, Bank of Canada 04-21, Bank of Canada.
  10. M S Mohanty & Marc Klau, 2001. "What determines inflation in emerging market economies?," BIS Papers chapters, in: Bank for International Settlements (ed.), Modelling aspects of the inflation process and the monetary transmission mechanism in emerging market countries, volume 8, pages 1-38 Bank for International Settlements.
  11. Patricia S. Pollard & Cletus C. Coughlin, 2004. "Size matters: asymmetric exchange rate pass-through at the industry level," Working Papers, Federal Reserve Bank of St. Louis 2003-029, Federal Reserve Bank of St. Louis.
  12. Mario Marazzi & Nathan Sheets & Robert J. Vigfusson & Jon Faust & Joseph Gagnon & Jaime Marquez & Robert F. Martin & Trevor Reeve & John Rogers, 2005. "Exchange rate pass-through to U.S. import prices: some new evidence," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 833, Board of Governors of the Federal Reserve System (U.S.).
  13. Sven W. Arndt & J. David Richardson, 1987. "Real-Financial Linkages Among Open Economies," NBER Working Papers 2230, National Bureau of Economic Research, Inc.
  14. Pinelopi K. Goldberg & Michael M. Knetter, 1996. "Goods Prices and Exchange Rates: What Have We Learned?," NBER Working Papers 5862, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Luis Carranza & José E. Galdón-Sánchez & Javier Gómez Biscarri, 2004. "Exchange Rate and Inflation Dynamics in Dollarized Economies," Faculty Working Papers, School of Economics and Business Administration, University of Navarra 10/04, School of Economics and Business Administration, University of Navarra.
  2. Subit Gokarn & Bhupal Singh, 2011. "External factors and monetary policy: Indian evidence," BIS Papers chapters, in: Bank for International Settlements (ed.), Capital flows, commodity price movements and foreign exchange intervention, volume 57, pages 189-199 Bank for International Settlements.
  3. Przystupa, Jan & Wróbel, Ewa, 2009. "Asymmetry of the exchange rate pass-through: An exercise on the Polish data," MPRA Paper 17660, University Library of Munich, Germany.
  4. Jinbin Wang & Nan Li, 2010. "Exchange rate pass-through: The case of China," Frontiers of Economics in China, Springer, Springer, vol. 5(3), pages 356-374, September.
  5. Naa Akofio-Sowah, 2009. "Is There a Link Between Exchange Rate Pass-Through and the Monetary Regime: Evidence from Sub-Saharan Africa and Latin America," International Advances in Economic Research, Springer, Springer, vol. 15(3), pages 296-309, August.
  6. Ila Patnaik & Ajay Shah & Rudrani Bhattacharya, 2011. "Monetary Policy Transmission in an Emerging Market Setting," IMF Working Papers 11/5, International Monetary Fund.
  7. Berner, Eike, 2011. "Exchange rate pass-through: New evidence from German micro data," Economics Working Papers 2011,01, Christian-Albrechts-University of Kiel, Department of Economics.
  8. Pradyut Kumar Pyne & Saikat Sinha Roy, 2009. "Exchange Rate Pass-Through in India an Exploration with Sectoral Import Prices," DEGIT Conference Papers, DEGIT, Dynamics, Economic Growth, and International Trade c014_038, DEGIT, Dynamics, Economic Growth, and International Trade.
  9. Luis Carranza & José Enrique Galdón Sánchez & Javier Gómez Biscarri, . "The relationship between investment and large exchange rate depreciations in dollarized economies," Faculty Working Papers, School of Economics and Business Administration, University of Navarra 01/08, School of Economics and Business Administration, University of Navarra.
  10. Brun-Aguerre, Raphael & Fuertes, Ana-Maria & Phylaktis, Kate, 2012. "Exchange rate pass-through into import prices revisited: What drives it?," Journal of International Money and Finance, Elsevier, Elsevier, vol. 31(4), pages 818-844.

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