Real Exchange Rate Overshooting in Real Business Cycle Model - An Empirical Evidence From India
AbstractThe objective of this paper is to establish the ability of a Real Business Cycle (RBC) model to account for the behaviour of the real exchange rate, using Indian data (1966-1997). We calibrate the dynamic general equilibrium open economy model (Minford, Sofat 2004) based on optimising decisions of rational agents, using annual data for India. The first order conditions from the households' and firms' optimisation problem are used to derive the behavioural equations of the model. The interaction with the rest of the world comes in the form of uncovered real interest rate parity and current account both of which are explicitly micro-founded. The paper discusses the simulation results of 1 percent per annum productivity growth shock, which shows that the real exchange rate appreciates and then goes back to a new equilibrium (lower than the previous one), producing a business cycle. Thus the behaviour of the real exchange rate may be explicable within the RBC context. Finally we test our model and evaluate statistically whether our calibrated model is seriously consistent with the real exchange rate data, using bootstrapping procedure. We bootstrap our model to generate pseudo real exchange rate series and find that the ARIMA parameters estimated for the actual real exchange rate data lie within the 95% confidence limits constructed by bootstrapping. We find the same result for the nominal rigidity version of the RBC model. So we conclude that the behaviour of the Indian real exchange rate (US $ / Indian Rupees) can be explained by RBC.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Cardiff University, Cardiff Business School, Economics Section in its series Cardiff Economics Working Papers with number E2008/1.
Length: 63 pages
Date of creation: Jan 2008
Date of revision:
Contact details of provider:
Postal: Aberconway Building, Colum Drive, CARDIFF, CF10 3EU
Phone: +44 (0) 29 20874417
Fax: +44 (0) 29 20874419
Web page: http://business.cardiff.ac.uk/research/academic-sections/economics/working-papers
More information through EDIRC
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-01-19 (All new papers)
- NEP-CWA-2008-01-19 (Central & Western Asia)
- NEP-DGE-2008-01-19 (Dynamic General Equilibrium)
- NEP-IFN-2008-01-19 (International Finance)
- NEP-MAC-2008-01-19 (Macroeconomics)
You can help add them by filling out this form.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Bruce Webb).
If references are entirely missing, you can add them using this form.