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Interest Rate Determination in India: The Role of Domestic and External Factors

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  • Pami Dua

    (Delhi School of Economics)

  • B.L. Pandit

    (Delhi School of Economics)

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Abstract

This paper examines the determinants of interest rates in India in the post reform period in the context of a model that takes into account both domestic and external factors. The short- and long-run behaviour of interest rates (commercial paper rate, three-month Treasury bill rate, twelve-month Treasury bill rate) is studied. The empirical results are robust across interest rates and indicate the existence of a cointegrating relationship between real interest rates, real government expenditure, real money supply, foreign interest rates and the forward premium. The estimations also show that movements in interest rates are Granger caused by both domestic and external factors.

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Bibliographic Info

Paper provided by Centre for Development Economics, Delhi School of Economics in its series Working papers with number 92.

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Length: 30 pages
Date of creation: Jun 2001
Date of revision:
Handle: RePEc:cde:cdewps:92

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  1. Granger, Clive W J, 1986. "Developments in the Study of Cointegrated Economic Variables," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 48(3), pages 213-28, August.
  2. Ul Haque, Nadeem & Montiel, Peter J., 1990. "How mobile is capital in developing countries?," Economics Letters, Elsevier, vol. 33(4), pages 359-362, August.
  3. Dolado, Juan J & Jenkinson, Tim & Sosvilla-Rivero, Simon, 1990. " Cointegration and Unit Roots," Journal of Economic Surveys, Wiley Blackwell, vol. 4(3), pages 249-73.
  4. Peter C.B. Phillips & Pierre Perron, 1986. "Testing for a Unit Root in Time Series Regression," Cowles Foundation Discussion Papers 795R, Cowles Foundation for Research in Economics, Yale University, revised Sep 1987.
  5. 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.
  6. Campbell, John & Perron, Pierre, 1991. "Pitfalls and Opportunities: What Macroeconomists Should Know about Unit Roots," Scholarly Articles 3374863, Harvard University Department of Economics.
  7. Blejer, Mario I & Diaz, Jose Gil, 1986. "Domestic and External Factors in the Determination of the Real Interest Rate: The Case of Uruguay," Economic Development and Cultural Change, University of Chicago Press, vol. 34(3), pages 589-606, April.
  8. Granger, C. W. J. & Newbold, P., 1974. "Spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 2(2), pages 111-120, July.
  9. Nadeem U. Haque & Kajal Lahiri & Peter J. Montiel, 1990. "A Macroeconometric Model for Developing Countries," IMF Staff Papers, Palgrave Macmillan, vol. 37(3), pages 537-559, September.
  10. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
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