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Monetary, Real Shocks And Exchange Rate Variations In India

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  • BISWAJIT MAITRA

    (University of Gour Banga, India)

Abstract

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

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    6. 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.
    7. Mr. Alun H. Thomas, 1997. "Is the Exchange Rate a Shock Absorber? the Case of Sweden," IMF Working Papers 1997/176, International Monetary Fund.
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    9. Sargent, Thomas J & Wallace, Neil, 1975. ""Rational" Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 83(2), pages 241-254, April.
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    12. repec:pri:cepsud:221chow is not listed on IDEAS
    13. 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.
    14. 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.
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    Cited by:

    1. Biswajit Maitra, 2018. "Determinants of Nominal Interest Rates in India," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 16(1), pages 265-288, March.

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    More about this item

    Keywords

    Exchange Rate Overshooting; Unanticipated Money; Unanticipated Output; Vector Autoregression; Impulse Response Function; Variance Decomposition;
    All these keywords.

    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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