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Assessing the Role of Trade in Transmission of Global Financial Crisis to the Indian Economy

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  • Raj, Rajesh
  • Bordoloi, Sanjib
  • Bharti, Nalin
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    Abstract

    Over the past few decades, while trade has contributed significantly to economic growth in various economies including India, openness has also exposed them to vagaries of external shocks. While recent global financial crisis (GFC) essentially originated in advanced economies, it got transmitted to emerging market economies through three main channels viz., financial, trade, and confidence channel. Relatively, while financial channel had a more dominant role in transmitting global shocks to Indian economy, its growing trade openness had led to decline in both exports and imports from the latter half of 2008 till 2009. Against this backdrop, this study primarily focuses on studying the impact of trade shock emanating from GFC on the Indian economy. In empirical analysis, it is found that the impact of recent trade shock on the economy remained minimal and short-lived. Under S-VAR framework (quarterly data from 1996-97 to 2009-10), impulse response analysis suggests that the impact of export demand on India’s gross domestic product (GDP) persists for a short while, which is validated by recent strong rebound of the economy in the aftermath of global financial crisis. This is in line with our expectations as GDP growth in India is primarily driven by domestic consumption, while external demand plays a minimal role.

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    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 40208.

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    Date of creation: Aug 2011
    Date of revision: Dec 2011
    Publication status: Published in Indian Journal of Economics & Business 4.10(2011): pp. 533-552
    Handle: RePEc:pra:mprapa:40208

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    Keywords: Trade; Financial Crises; Open economy; India;

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    1. Korhonen, Iikka & Fidrmuc , Jarko, 2009. "The impact of the global financial crisis on business cycles in Asian emerging economies," BOFIT Discussion Papers, Bank of Finland, Institute for Economies in Transition 11/2009, Bank of Finland, Institute for Economies in Transition.
    2. Michael Artis & Toshihiro Okubo, 2011. "Does International Trade Really Lead To Business Cycle Synchronization?—A Panel Data Approach," Manchester School, University of Manchester, University of Manchester, vol. 79(2), pages 318-332, 03.
    3. International Monetary Fund, 1999. "Sources of Contagion," IMF Working Papers 99/146, International Monetary Fund.
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