We explore the impact of Real Exchange Rate changes on the performance of Indian manufacturing firms over the period [2000][2001][2002][2003][2004][2005][2006][2007][2008][2009][2010][2011][2012]. Our empirical analysis shows that real exchange rate movements have a significant impact on Indian firms' performance through the cost as well as the revenue channel. The impact depends upon the share of imports & exports along with the degree of market power as reflected in the time varying firm level mark up. However, presence of overvaluation negates the beneficial effects of exchange rate appreciation operating through the lower input cost channel. The same cannot be said about the 'price competitiveness' effect working through the export channel.
JEL Classifications: F1, F4
Foreign-aid flows to poor, aid-dependent economies are highly volatile and procyclical. Shortfalls in aid coincide with shortfalls in GDP and government revenues. This increases the consumption volatility in aid dependent countries, thereby causing substantial welfare losses. This paper finds that indexing aid flows to exogenous shocks, like a change in the terms of trade, can significantly improve the welfare of an aiddependent country by lowering its output and consumption volatility. Compared to the benchmark specification with stochastic aid flows, indexation of aid flows to terms-oftrade shocks can reduce the cost of business-cycle fluctuations in the recipient country by 4% of permanent consumption. Moreover, use of indexed aid can allow donors to reduce the aid flows by 3% without lowering the level of welfare in the recipient country.
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