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Interlinkage between Real Exchange rate and Current Account Behaviors: Evidence from India

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Author Info

  • Mohamed Arouri
  • Arif Billah Dar
  • Niyati Bhanja
  • Aviral Kumar Tiwari
  • FrédéricTeulon

Abstract

The study analyzes the dynamic interlinkage between India’s real effective exchange rate and real current account deficit using standard VAR and structural VAR (SVAR). The empirical analysis suggests that a real currency appreciation leads to an improvement in the current account deficit, thereby highlighting the occurrence of permanent shocks such as technical innovations, productivity shocks, and changes in tastes and preferences. A positive shock to the current account deficit leads to an appreciation in the real exchange rate. Moreover, both current account and real exchange rates are found to be affected by the changes in these variables themselves rather than changes in the other variables in the system.

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Bibliographic Info

Paper provided by Department of Research, Ipag Business School in its series Working Papers with number 2014-088.

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Length: 8 pages
Date of creation: 12 Feb 2014
Date of revision:
Handle: RePEc:ipg:wpaper:2014-088

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Keywords: Real Exchange Rate; Current Account; India; VAR; SVAR;

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  1. Menzie D. Chinn & Eswar S. Prasad, 2000. "Medium-Term Determinants of Current Accounts in Industrial and Developing Countries: An Empirical Exploration," NBER Working Papers 7581, National Bureau of Economic Research, Inc.
  2. Patnaik, Ila & Shah, Ajay, 2008. "Does the currency regime shape unhedged currency exposure," Working Papers 08/50, National Institute of Public Finance and Policy.
  3. Bussière, Matthieu & Fratzscher, Marcel & Müller, Gernot J., 2005. "Productivity shocks, budget deficits and the current account," Working Paper Series 0509, European Central Bank.
  4. Menzie David Chinn & Jaewoo Lee, 2002. "Current Account and Real Exchange Rate Dynamics in the G-7 Countries," IMF Working Papers 02/130, International Monetary Fund.
  5. Olivier Jean Blanchard & Danny Quah, 1988. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," NBER Working Papers 2737, National Bureau of Economic Research, Inc.
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  7. Leonard, Greg & Stockman, Alan C, 2002. "Current Accounts and Exchange Rates: A New Look at the Evidence," Review of International Economics, Wiley Blackwell, vol. 10(3), pages 483-96, August.
  8. Zivot, Eric & Andrews, Donald W K, 1992. "Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-Root Hypothesis," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(3), pages 251-70, July.
  9. Amaresh Samantaraya, 2009. "An Empirical Analysis of Exchange Rate Pass-Through in India: Relevance for Inflation Management," The IUP Journal of Monetary Economics, IUP Publications, vol. 0(2), pages 17-31, May.
  10. Menzie D. Chinn & Jaewoo Lee, 2005. "Three Current Account Balances: A "Semi-Structuralist" Interpretation," NBER Working Papers 11853, National Bureau of Economic Research, Inc.
  11. Massimo Giuliodori, 2004. "Nominal shocks and the current account: A structural VAR analysis of 14 OECD countries," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 140(4), pages 569-591, December.
  12. Singh, Tarlok, 2002. "India's trade balance: the role of income and exchange rates," Journal of Policy Modeling, Elsevier, vol. 24(5), pages 437-452, August.
  13. Ron Alquist & Menzie D. Chinn, 2002. "Productivity and the Euro-Dollar Exchange Rate Puzzle," NBER Working Papers 8824, National Bureau of Economic Research, Inc.
  14. Venus Khim-Sen Liew, 2004. "Which Lag Length Selection Criteria Should We Employ?," Economics Bulletin, AccessEcon, vol. 3(33), pages 1-9.
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