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Real Exhange Rate Stationarity in Managed Floats: Evidence From India

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  • Renu Kohli

    (Reserve Bank of India)

Abstract

This paper tests for mean-reversion in real exchange rates for India during the recent (managed) float period yield evidence of mean- reversion in the real exchange rate series constructed with the consumer price index as deflator as well as for a series constructed using the ratio of wholesale and consumer price indices to proxy for the shares of tradable and non-tradable goods. An interesting finding is that there is no evidence for mean-reversion when the real exchange rate is computed with a broader base of currencies, suggesting exchange rate policy stabilisation effects vis-a-vis the US dollar. Another finding is that PPP fails to hold for the detrended relative prices of traded to non- traded goods, indicating possible presence of Balassa-Samuelson effect. The findings indicate the need for a model specifying real deterinants of the exchange rate to separate nominal disturbances from the real effects.

Suggested Citation

  • Renu Kohli, 2004. "Real Exhange Rate Stationarity in Managed Floats: Evidence From India," International Finance 0405014, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpif:0405014
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    Cited by:

    1. Rituparna Kar & Nityananda Sarkar, 2006. "Mean and volatility dynamics of Indian rupee/US dollar exchange rate series: an empirical investigation," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 13(1), pages 41-69, March.
    2. Soubarna Pal, 2011. "Productivity Differential and Bilateral Real Exchange Rate between India and US," Journal of Quantitative Economics, The Indian Econometric Society, vol. 9(1), pages 146-155.
    3. Natalie D. Hegwood & Hiranya K. Nath, 2014. "Real exchange rate dynamics: Evidence from India," Economic Analysis and Policy, Elsevier, vol. 44(4), pages 396-404.
    4. Hwa-Taek Lee & Gawon Yoon, 2013. "Does purchasing power parity hold sometimes? Regime switching in real exchange rates," Applied Economics, Taylor & Francis Journals, vol. 45(16), pages 2279-2294, June.
    5. Khan, Muhammad Arshad & Qayyum, Abdul, 2007. "Exchange Rate Determination In Pakistan: Evidence Based On Purchasing Power Parity Theory," MPRA Paper 6754, University Library of Munich, Germany.

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    More about this item

    Keywords

    real exchange rates; purchasing power parity; exchange rate policy; India; Balassa-Samuelson effect;
    All these keywords.

    JEL classification:

    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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