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Capital Flow Volatility And Exchange Rates-- The Case Of India

Author

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  • Pami Dua

    (Delhi School of Economics)

  • Partha Sen

    (Delhi School of Economics)

Abstract

This paper examines the relationship between the real exchange rate, level of capital flows, volatility of the flows, fiscal and monetary policy indicators and the current account surplus for the Indian economy for the period 1993Q2 to 2004Q1. The estimations indicate that the variables are cointegrated and each granger causes the real exchange rate. The generalized variance decompositions show that determinants of the real exchange rate, in descending order of importance include net capital inflows and their volatility (jointly), government expenditure, current account surplus and the money supply. A preliminary analysis suggests that a similar analysis can be performed for the foreign exchange reserves held by the RBI.

Suggested Citation

  • Pami Dua & Partha Sen, 2006. "Capital Flow Volatility And Exchange Rates-- The Case Of India," Working papers 144, Centre for Development Economics, Delhi School of Economics.
  • Handle: RePEc:cde:cdewps:144
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Partha Sen, 2007. "Capital inflows, financial repression, and macroeconomic policy in India since the reforms," Oxford Review of Economic Policy, Oxford University Press, vol. 23(2), pages 292-310, Summer.
    2. Anita Mirchandani, 2013. "Analysis of Macroeconomic Determinants of Exchange Rate Volatility in India," International Journal of Economics and Financial Issues, Econjournals, vol. 3(1), pages 172-179.
    3. Abdul Rashid & Fazal Husain, 2010. "Capital Inflows, Inflation and Exchange Rate Volatility: An Investigation for Linear and Nonlinear Causal Linkages," PIDE-Working Papers 2010:63, Pakistan Institute of Development Economics.
    4. Narayan Sethi, 2012. "Inflows and their Macroeconomic Impact in India a VAR Analysis," Romanian Economic Journal, Department of International Business and Economics from the Academy of Economic Studies Bucharest, vol. 15(45), pages 93-142, December.
    5. Somesh Kumar Mathur & Surendra Babu, 2014. "Modelling & Forecasting of Re/$ Exchange rate – An empirical analysis," 2nd International Conference on Energy, Regional Integration and Socio-Economic Development 7741, EcoMod.
    6. Bhanumurthy, N.R. & Bose, Sukanya & Panda, Swayamsiddha, 2014. "Modeling India's External Sector: Review and Some Empirics," Working Papers 14/138, National Institute of Public Finance and Policy.

    More about this item

    Keywords

    real exchange rate; capital flows; foreign exchange reserves; cointegration;

    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
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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