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The Sources of Real Exchange Rate Fluctuations in India


  • Tomoe Moore

    (Department of Economics, Finance and Accounting, Coventry University, Coventry, CV1 5FB, England)

  • Eric J. Pentecost

    (Department of Economics, Loughborough University, Loughborough, Leicestershire, LE11 3TU, England.)


This paper examines the contributions of real (permanent) and nominal (temporary) shocks on the nominal and real exchange rates of the Indian Rupee against the US dollar in the period since 1993, using the long-run structural VAR technique. If nominal shocks account for most of the movement in the real exchange rate then the authorities can use monetary policy to influence the competitiveness of the economy. On the other hand, if real shocks account for most of the variation in the real exchange rate the Purchasing Power Parity (PPP) hypothesis is invalid and monetary policy ineffective as a tool of exchange rate management. The paper finds that the real exchange rate of the Rupee against the US dollar is non-stationary and that real shocks have permanent effects on the exchange rate, thus making exchange rate management at best futile and possibly harmful to the economy.

Suggested Citation

  • Tomoe Moore & Eric J. Pentecost, 2006. "The Sources of Real Exchange Rate Fluctuations in India," Indian Economic Review, Department of Economics, Delhi School of Economics, vol. 41(1), pages 9-23, July.
  • Handle: RePEc:dse:indecr:v:41:y:2006:i:1:p:9-23

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    References listed on IDEAS

    1. Majumder, Rajarshi, 2004. "Infrastructure And Regional Development In India," MPRA Paper 4814, University Library of Munich, Germany.
    2. Majumder, Rajarshi, 2003. "Infrastructural Facilities in India: District Level Availability Index," MPRA Paper 4779, University Library of Munich, Germany.
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    Cited by:

    1. Takeshi Inoue & Shigeyuki Hamori, 2009. "What Explains Real and Nominal Exchange Rate Fluctuations?: Evidence from SVAR Analysis for India," Economics Bulletin, AccessEcon, vol. 29(4), pages 2803-2815.
    2. A. H. Ahmad & Eric J. Pentecost, 2009. "Sources Of Real Exchange Rate Fluctuations: Empirical Evidence From Nine African Countries," Manchester School, University of Manchester, vol. 77(s1), pages 66-84, September.
    3. Biswajit Maitra, 2016. "Monetary, Real Shocks And Exchange Rate Variations In India," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 41(1), pages 81-103, March.
    4. Mostafa Goudarzi & Komeil Khanarinejad & Zahra Ardakani, 2012. "Investigation of the Factors Affecting Real Exchange Rate in Iran," Acta Universitatis Danubius. OEconomica, Danubius University of Galati, issue 4(4), pages 55-67, August.
    5. Nderitu Kingori, 2016. "Market Structure, Macroeconomic Shocks, and Banking Risk in Kenya," Econometric Research in Finance, SGH Warsaw School of Economics, Collegium of Economic Analysis, vol. 1(2), pages 81-113, December.

    More about this item


    Structural VAR model; the real exchange rate; permanent and transitory shocks; India;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange


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