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Interlinkage between Real Exchange rate and Current Account Behaviors: Evidence from India

  • Mohamed Arouri
  • Arif Billah Dar
  • Niyati Bhanja
  • Aviral Kumar Tiwari
  • FrédéricTeulon

The study analyzes the dynamic interlinkage between India’s real effective exchange rate and real current account deficit using standard VAR and structural VAR (SVAR). The empirical analysis suggests that a real currency appreciation leads to an improvement in the current account deficit, thereby highlighting the occurrence of permanent shocks such as technical innovations, productivity shocks, and changes in tastes and preferences. A positive shock to the current account deficit leads to an appreciation in the real exchange rate. Moreover, both current account and real exchange rates are found to be affected by the changes in these variables themselves rather than changes in the other variables in the system.

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Paper provided by Department of Research, Ipag Business School in its series Working Papers with number 2014-088.

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Length: 8 pages
Date of creation: 12 Feb 2014
Date of revision:
Handle: RePEc:ipg:wpaper:2014-088
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  1. Bussière, Matthieu & Fratzscher, Marcel & Müller, Gernot J., 2010. "Productivity shocks, budget deficits and the current account," Journal of International Money and Finance, Elsevier, vol. 29(8), pages 1562-1579, December.
  2. Olivier Jean Blanchard & Danny Quah, 1988. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," NBER Working Papers 2737, National Bureau of Economic Research, Inc.
  3. Zivot, Eric & Andrews, Donald W K, 2002. "Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-Root Hypothesis," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 25-44, January.
  4. Venus Khim-Sen Liew, 2004. "Which Lag Length Selection Criteria Should We Employ?," Economics Bulletin, AccessEcon, vol. 3(33), pages 1-9.
  5. Massimo Giuliodori, 2004. "Nominal shocks and the current account: A structural VAR analysis of 14 OECD countries," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 140(4), pages 569-591, December.
  6. Menzie D. Chinn & Jaewoo Lee, 2005. "Three Current Account Balances: A "Semi-Structuralist" Interpretation," NBER Working Papers 11853, National Bureau of Economic Research, Inc.
  7. Patnaik, Ila & Shah, Ajay, 2008. "Does the currency regime shape unhedged currency exposure," Working Papers 08/50, National Institute of Public Finance and Policy.
  8. Menzie David Chinn & Eswar Prasad, 2000. "Medium-Term Determinants of Current Accounts in Industrial and Developing Countries; An Empirical Exploration," IMF Working Papers 00/46, International Monetary Fund.
  9. Lee,J. & Chinn,M.D., 2004. "Current account and real exchange rate dynamics in the G-7 countries," Working papers 11, Wisconsin Madison - Social Systems.
  10. Michael B. Devereux & Hans Genberg, 2006. "Currency Appreciation and Current Account Adjustment," Working Papers 172006, Hong Kong Institute for Monetary Research.
  11. Greg Leonard & Alan C. Stockman, 2001. "Current Accounts and Exchange Rates: A New Look at the Evidence," NBER Working Papers 8361, National Bureau of Economic Research, Inc.
  12. Singh, Tarlok, 2002. "India's trade balance: the role of income and exchange rates," Journal of Policy Modeling, Elsevier, vol. 24(5), pages 437-452, August.
  13. Amaresh Samantaraya, 2009. "An Empirical Analysis of Exchange Rate Pass-Through in India: Relevance for Inflation Management," The IUP Journal of Monetary Economics, IUP Publications, vol. 0(2), pages 17-31, May.
  14. Ron Alquist & Menzie D. Chinn, 2002. "Productivity and the Euro-Dollar Exchange Rate Puzzle," NBER Working Papers 8824, National Bureau of Economic Research, Inc.
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