IDEAS home Printed from https://ideas.repec.org/p/iik/wpaper/24.html
   My bibliography  Save this paper

Expected Purchasing Power Parity andBudget Imbalances: Modelling the Euro And the Rupee Exchange Rates

Author

Listed:
  • Bala Batavia

    (DePaul University)

  • Parameswar Nandakumar

    (Indian Institute of Management Kozhikode)

  • Cheick Wague

    (Sodertorn University of Stockholm)

Abstract

An expected relative PPP model, augmented by elements of a monetary model and by external influences, is used to track the path of the Euro-Dollar rate since the inception of the European currency. A similar model is also applied to the estimation of the Rupee – Dollar exchange rate. Expected inflation rates, based on a specified formation process, are, indeed, seen to be significant determinants of the Euro exchange rate. While money supplies are not significant, interest rate differentials do matter; higher real Euro area interest rates appreciate the Euro. US government budget deficits appreciate the Dollar with a lag, presumably due to financing capital inflows, but current account deficits do not have a perceptible influence in the period of the study. Oil price increases and higher international reserve holdings in major Asian markets, which may be skewed towards the dollar, also have no discernible impact on the Euro-Dollar rate. For the rupee – dollar rate, interest rate differentials and inflation differentials work well as predictors. Higher interest rates relative to the global rates appreciate the rupee, i.e., the rupee – dollar rate falls. Higher expected inflation in India depreciates the rupee. Current account surpluses are seen to appreciate the rupee, but investment inflows function poorly as a predictor. A random walk model may work as well as a formal monetary – PPP model in forecasting the rupee exchange rate.

Suggested Citation

  • Bala Batavia & Parameswar Nandakumar & Cheick Wague, 2007. "Expected Purchasing Power Parity andBudget Imbalances: Modelling the Euro And the Rupee Exchange Rates," Working papers 24, Indian Institute of Management Kozhikode.
  • Handle: RePEc:iik:wpaper:24
    as

    Download full text from publisher

    File URL: https://iimk.ac.in/websiteadmin/FacultyPublications/Working%20Papers/24fullp.pdf?t=10
    File Function: First version, 2016
    Download Restriction: no
    ---><---

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:iik:wpaper:24. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sudheesh Kumar (email available below). General contact details of provider: https://edirc.repec.org/data/iikmmin.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.