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Empirical investigation of the behaviour of the bilateral real exchange rate between India and the USA.

Pal, Soubarna. 2007. Empirical investigation of the behaviour of the bilateral real exchange rate between India and the USA. PhD Thesis, Cardiff University.

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Abstract

Using annual data for the period 1959-2001 for India and USA, we examine the effect of productivity differential on bilateral real exchange rate between India and US (the Harrod Balassa Samuelson effect) in a non-linear framework. We find significant evidence of non-linear mean reversion towards the long run equilibrium. We get the evidence that rate of mean reversion is much faster with larger shock. We find that relatively higher productivity growth in US is accompanied by its real exchange rate appreciation vis-a-vis India. Then we explain the behaviour of Indian real exchange rate (US Dollar/ Indian Rupees) using Real Business Cycle model and Overlapping Wage Contract model for the period 1966-1997. We find that Indian real exchange rate appreciates as a result of a deterministic productivity growth shock and then falls back to a lower equilibrium, producing a business cycle and the expected simulation properties. In the Balassa Samuelson model we find that the long run real exchange rate appreciates with rise in productivity. But in the RBC model the short run real exchange rate appreciates as a result of a deterministic productivity growth shock and then goes back to an equilibrium lower than the previous equilibrium in the long run. We discuss the mechanisms of the two models in details in the thesis. We test the validity of the models by method of bootstrapping and we conclude that we can use both Balassa Samuelson model and RBC / OLW model to explain the behaviour of the bilateral real exchange rate between India and US.

Item Type: Thesis (PhD)
Status: Unpublished
Schools: Business (Including Economics)
Subjects: H Social Sciences > HG Finance
ISBN: 9781303175114
Funders: Julian Hodge Institute of Applied Macroeconomics
Date of First Compliant Deposit: 30 March 2016
Last Modified: 12 Feb 2016 23:12
URI: http://orca.cf.ac.uk/id/eprint/54321

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