Sectoral Exchange Rate Pass-through: A Tale of Two Policy Regimes in India
AbstractThis paper uses panel data to analyse the extent to which the prices of India’s imports and exports in nine product groups react to exchange rate changes before (1980-90) and after (1991-2001) a change in policy that included the adoption of a flexible exchange rate regime and an acceleration of trade liberalisation. It finds that for all the nine groups of Indian industries the null hypothesis of complete pass-through from exchange rate changes into import prices cannot be rejected. On the contrary, the results suggest that Indian exporters appear to have to some degree passed through exchange rate changes into foreign currency export prices in three industry groups in the 1980s and in six groups of industries in the 1990s. The increase in the number of sectors exhibiting some degree of pass-through in the 1990s, relative to the 1980s, may be partly attributable to the elimination of currency and trade controls. Whilst the pass-through into import prices does not exhibit a structural break around 1991, a Chow test revealed the existence of such structural break in pass-through into export prices. The pass-through to import prices seems to be exogenous (determined by external factors), but the pass-through to export prices appears to be endogenous (driven by internal factors, mostly trade and exchange rate policies).
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Bibliographic InfoPaper provided by Department of Economics, Loughborough University in its series Discussion Paper Series with number 2004_12.
Date of creation: Mar 2004
Date of revision: Mar 2004
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sectoral exchange rate pass-through; pricing-to-market; panel estimation; India;
Find related papers by JEL classification:
- F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
- F14 - International Economics - - Trade - - - Empirical Studies of Trade
- F31 - International Economics - - International Finance - - - Foreign Exchange
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-10-15 (All new papers)
- NEP-FIN-2005-10-15 (Finance)
- NEP-FMK-2005-10-15 (Financial Markets)
- NEP-MAC-2005-10-15 (Macroeconomics)
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