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Oil Price, Exchange Rate and the Indian Macroeconomy

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  • Ghosh, Taniya

Abstract

General discussions on the Indian macroeconomy have centred on two things in the recent past: the impact of depreciation of rupee and the effects of falling world oil prices. Using the structural vector autoregressive approach, the dynamic relationship between movements in oil prices and exchange rates with macroeconomic variables like price, output, interest rate and money are investigated. Additionally, a comparative analysis is conducted to show how each of these structural shocks has historically affected price, output and exchange rate. The results show strong link among these variables. Three results have important policy implications: (i) the world price of oil has a great potential to affect India’s output, (ii) targeting depreciation of rupee to expand output may not be an effective policy tool for the RBI, and (iii) variation in rupee’s value can have medium- to long-term impact on world price of oil.

Suggested Citation

  • Ghosh, Taniya, 2016. "Oil Price, Exchange Rate and the Indian Macroeconomy," MPRA Paper 90629, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:90629
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    References listed on IDEAS

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    1. Hamilton, James D., 1996. "This is what happened to the oil price-macroeconomy relationship," Journal of Monetary Economics, Elsevier, vol. 38(2), pages 215-220, October.
    2. Guitian, Manuel, 1976. "The effects of changes in the exchange rate on output, prices and the balance of payments," Journal of International Economics, Elsevier, vol. 6(1), pages 65-74, February.
    3. Hilde C. Bjørnland, 2009. "Oil Price Shocks And Stock Market Booms In An Oil Exporting Country," Scottish Journal of Political Economy, Scottish Economic Society, vol. 56(2), pages 232-254, May.
    4. William A. Barnett & Soumya Suvra Bhadury & Taniya Ghosh, 2016. "An SVAR Approach to Evaluation of Monetary Policy in India: Solution to the Exchange Rate Puzzles in an Open Economy," Open Economies Review, Springer, vol. 27(5), pages 871-893, November.
    5. Hamilton, James D, 1983. "Oil and the Macroeconomy since World War II," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 228-248, April.
    6. Kim, Soyoung & Roubini, Nouriel, 2000. "Exchange rate anomalies in the industrial countries: A solution with a structural VAR approach," Journal of Monetary Economics, Elsevier, vol. 45(3), pages 561-586, June.
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    More about this item

    Keywords

    Money; Structural VAR; Exchange rate; Price; Output;
    All these keywords.

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • F0 - International Economics - - General

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