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Monetary, Real Shocks And Exchange Rate Variations In India



    () (University of Gour Banga, India)


This article examines how a rate of the change of the exchange rate as well as how a rate of the change of the expected exchange rate are related to the unanticipated change in domestic money supply and output. Empirical analysis involves quarterly time series of the rupee/US dollar exchange rate, the narrow money M1, the broad money M3 and output in India under the market based exchange rate regime. The paper testifies exchange rate overshooting phenomenon where both unanticipated M1 and M3 cause variations and depreciation of rupee. Some evidence of the causal role of unanticipated output is observed. The rupee is found to be sensitive with both unanticipated money and output shocks where the impact of money shocks is stronger than output shocks.

Suggested Citation

  • 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.
  • Handle: RePEc:jed:journl:v:41:y:2016:i:1:p:81-103

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    References listed on IDEAS

    1. Bankim Chadha & Eswar Prasad, 1997. "Real Exchange Rate Fluctuations and the Business Cycle: Evidence from Japan," IMF Staff Papers, Palgrave Macmillan, vol. 44(3), pages 328-355, September.
    2. 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.
    3. Kohli, Renu, 2003. "Real exchange rate stabilisation and managed floating: exchange rate policy in India, 1993-2001," Journal of Asian Economics, Elsevier, vol. 14(3), pages 369-387, June.
    4. Biswajit Maitra & Chandan Kumar Mukhopadhyay, 2011. "Causal Relation Between Money Supply and Exchange Rate in India Under the Basket Peg and Market Determination Regimes: A Time Series Analysis," The IUP Journal of Applied Economics, IUP Publications, vol. 0(2), pages 40-56, April.
    5. Gregory C. Chow, 2011. "Usefulness of Adaptive and Rational Expectations in Economics," Working Papers 1334, Princeton University, Department of Economics, Center for Economic Policy Studies..
    6. 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.
    7. repec:pri:cepsud:221chow is not listed on IDEAS
    8. Mussa, Michael, 1976. " The Exchange Rate, the Balance of Payments and Monetary and Fiscal Policy under a Regime of Controlled Floating," Scandinavian Journal of Economics, Wiley Blackwell, vol. 78(2), pages 229-248.
    9. Jan Gottschalk & Ashok Bhundia, 2003. "Sources of Nominal Exchange Rate Fluctuations in South Africa," IMF Working Papers 03/252, International Monetary Fund.
    10. Johnson, Harry G., 1977. "The monetary approach to the balance of payments : A nontechnical guide," Journal of International Economics, Elsevier, vol. 7(3), pages 251-268, August.
    11. Wang, Tao, 2005. "Sources of real exchange rate fluctuations in China," Journal of Comparative Economics, Elsevier, vol. 33(4), pages 753-771, December.
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    1. repec:spr:jqecon:v:16:y:2018:i:1:d:10.1007_s40953-017-0079-2 is not listed on IDEAS

    More about this item


    Exchange Rate Overshooting; Unanticipated Money; Unanticipated Output; Vector Autoregression; Impulse Response Function; Variance Decomposition;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F31 - International Economics - - International Finance - - - Foreign Exchange


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