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Real Effective Exchange Rate and Manufacturing Sector Performance: Evidence from Indian firms

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  • Dhasmana, Anubha
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    Abstract

    We explore the impact of Real Exchange Rate changes on the performance of Indian manufacturing firms over the period 2000-2012. Our empirical analysis shows that real exchange rate movements have a significant impact on Indian firms’ performance through the cost as well as the revenue channel. The impact depends upon the share of imports & exports along with the degree of market power as reflected in the time varying firm level mark up. However, presence of overvaluation negates the beneficial effects of exchange rate appreciation operating through the lower input cost channel. The same cannot be said about the ‘price competitiveness’ effect working through the export channel.

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    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 47479.

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    Date of creation: 08 Jun 2013
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    Handle: RePEc:pra:mprapa:47479

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    Keywords: Real Exchange Rate; Manufacturing Performance; Mark up;

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    1. Patnaik, Ila & Shah, Ajay, 2008. "Does the currency regime shape unhedged currency exposure," Working Papers 08/50, National Institute of Public Finance and Policy.
    2. Hong, Kiseok & Tornell, Aaron, 2005. "Recovery from a currency crisis: some stylized facts," Journal of Development Economics, Elsevier, vol. 76(1), pages 71-96, February.
    3. Jose Campa & Linda S. Goldberg, 1993. "Investment in Manufacturing, Exchange-Rates and External Exposure," NBER Working Papers 4378, National Bureau of Economic Research, Inc.
    4. Gordon M. Bodnar & M.H. Franco Wong, 2000. "Estimating Exchange Rate Exposures: Some "Weighty" Issues," NBER Working Papers 7497, National Bureau of Economic Research, Inc.
    5. Dominguez, Kathryn M.E. & Tesar, Linda L., 2006. "Exchange rate exposure," Journal of International Economics, Elsevier, vol. 68(1), pages 188-218, January.
    6. Michael Hutchison & Ilan Noy, 2002. "How bad are twins? output costs of currency and banking crises," Pacific Basin Working Paper Series 2002-02, Federal Reserve Bank of San Francisco.
    7. Gupta, Poonam & Mishra, Deepak & Sahay, Ratna, 2007. "Behavior of output during currency crises," Journal of International Economics, Elsevier, vol. 72(2), pages 428-450, July.
    8. Goldberg, Linda S, 1993. "Exchange Rates and Investment in United States Industry," The Review of Economics and Statistics, MIT Press, vol. 75(4), pages 575-88, November.
    9. Demir, Firat, 2010. "Exchange Rate Volatility and Employment Growth in Developing Countries: Evidence from Turkey," MPRA Paper 24477, University Library of Munich, Germany.
    10. Pinelopi Koujianou Goldberg & Michael M. Knetter, 1997. "Goods Prices and Exchange Rates: What Have We Learned?," Journal of Economic Literature, American Economic Association, vol. 35(3), pages 1243-1272, September.
    11. Nucci, Francesco & Pozzolo, Alberto F., 2001. "Investment and the exchange rate: An analysis with firm-level panel data," European Economic Review, Elsevier, vol. 45(2), pages 259-283, February.
    12. Parsley, David C. & Popper, Helen A., 2006. "Exchange rate pegs and foreign exchange exposure in East and South East Asia," Journal of International Money and Finance, Elsevier, vol. 25(6), pages 992-1009, October.
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