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Examining responsiveness of India’s trade flows to exchange rate movements

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  • Shingal, Anirudh

Abstract

Determinants of trade flows have always attracted researchers. In this paper, we model monthly trade flows in India over January 2000 – December 2007 in a bid to gauge their responsiveness to exchange rate movements. Capital account and overall BOP surplus have led the Indian Rupee (INR) to appreciate and forex reserves to accumulate. In so far as the RBI intervenes to stem this forex accretion by the net purchase of USD, it puts further pressure on the INR to appreciate. It therefore becomes important to study the response of the current account to these changes in the exchange rate. We employ standard empirical estimations of India’s export supply and import demand functions using data from the Reserve Bank of India. We also assess the short-term dynamics of these trade flows through error correction models. Finally, we estimate vector auto regression models to gauge the extent of contemporaneous interaction between trade flows and the explanatory variables in the system.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 32820.

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Date of creation: 27 Dec 2007
Date of revision: 18 Mar 2010
Handle: RePEc:pra:mprapa:32820

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Keywords: India; trade; imports; exports; exchange rate; VAR; Granger-causality;

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  1. Bahmani-Oskooee, Mohsen, 1986. "Determinants of international trade flows : The Case of Developing Countries," Journal of Development Economics, Elsevier, Elsevier, vol. 20(1), pages 107-123.
  2. Helen B. Junz & Rudolf R. Rhomberg, 1973. "Price competitiveness in export trade among industrial countries," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 22, Board of Governors of the Federal Reserve System (U.S.).
  3. Aigner, Dennis J & Goldfeld, Stephen M, 1974. "Estimation and Prediction from Aggregate Data when Aggregates are Measured More Accurately than Their Components," Econometrica, Econometric Society, Econometric Society, vol. 42(1), pages 113-34, January.
  4. Warner, Dennis & Kreinin, Mordechai E, 1983. "Determinants of International Trade Flows," The Review of Economics and Statistics, MIT Press, vol. 65(1), pages 96-104, February.
  5. Junz, Helen B & Rhomberg, Rudolf R, 1973. "Price Competitiveness in Export Trade Among Industrial Countries," American Economic Review, American Economic Association, American Economic Association, vol. 63(2), pages 412-18, May.
  6. Mohsen Bahmani-Oskooee, 1998. "Cointegration Approach to Estimate the Long-Run Trade Elasticities in LDCs," International Economic Journal, Taylor & Francis Journals, Taylor & Francis Journals, vol. 12(3), pages 89-96.
  7. Goldstein, Morris & Khan, Mohsin S, 1978. "The Supply and Demand for Exports: A Simultaneous Approach," The Review of Economics and Statistics, MIT Press, vol. 60(2), pages 275-86, May.
  8. Goldstein, Morris & Khan, Mohsin S., 1985. "Income and price effects in foreign trade," Handbook of International Economics, Elsevier, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 20, pages 1041-1105 Elsevier.
  9. Bahmani-Oskooee, Mohsen & Niroomand, Farhang, 1998. "Long-run price elasticities and the Marshall-Lerner condition revisited," Economics Letters, Elsevier, Elsevier, vol. 61(1), pages 101-109, October.
  10. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 12(2-3), pages 231-254.
  11. Mohsin S. Khan, 1974. "Import and Export Demand in Developing Countries (Demande à l'importation et l'exportation dans les pays en développement) (La demanda de importación y de exportación en los países en des," IMF Staff Papers, Palgrave Macmillan, vol. 21(3), pages 678-693, November.
  12. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, Econometric Society, vol. 55(2), pages 251-76, March.
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