Macroeconomic fundamentals and dynamics of the Indian rupee-dollar exchange rate

Sharma, Chandan; Setia, Rajat

doi:10.1108/jfep-11-2014-0069

Cited by 8 publications

(2 citation statements)

References 62 publications

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“…The asymptotic distributions of the test statistics depend on the values of ( p – r ) and the locations of the break-points in the sample. These break-points are denoted v j = ( t j / t ), where t is the full sample size and t j is the last observation of the j th sub-sample; j = 1, 2,…, q (for details, see Giles and Godwin, 2012; Sharma and Setia, 2015).…”

Section: Empirical Methodologymentioning

confidence: 99%

Estimating the size of the black economy: new evidence from India

Sharma

2019

IJOEM

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Purpose The issue of black economy has long been debated in India and it has been one of the key targets of policy action from last four decades. The debate is further fueled by demonetization of higher currency notes in the country. In this context, the purpose of this paper is to estimate the size of black economy in India for the period 1970–2017. Design/methodology/approach A currency demand approach is adopted for this purpose. The test of structure break indicates for a break in the system; therefore, the authors employ Johansen et al. (2000) cointegration test. For estimating the empirical model, the authors utilize fully modified ordinary least squares in a cointegration framework for taking care the endogeneity problem. Findings The estimates indicate that the Indian economy has a sizable black economy. In early 1970s, when the tax rate in India was significantly higher, the estimated black economy was above 30 percent of the official GDP. A variety of economic reforms including taxation, regulation and industrial licensing have drastically reduced the size to below 15 percent of official GDP in the last two decades. In the last estimated year (2017), the black economy was 23,849bn Indian rupees at current market price (around $400bn), which was 14 percent of the official GDP. Practical implications On the basis of the findings, the authors suggest some important fiscal, administrative and regulatory reforms to curb the generation of black economy in India. Originality/value The structural breaks can induce stochastic behavior similar to an integrated process, which makes it difficult to differentiate between the lack of cointegration and a structural shift. Thus, in the present study, the authors attempt to address this issue by incorporating the issue of structural break in the analysis. Furthermore, India is a cash-based economy; therefore, it is likely that currency-based models are more suitable. The application of advanced time-series techniques is likely to yield better and robust results.

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Section: Empirical Methodologymentioning

confidence: 99%

Estimating the size of the black economy: new evidence from India

Sharma

2019

IJOEM

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“…Thus, often it is difficult to distinguish between the risk associated with nominal exchange rate changes independent of price movements and the risk associated with all other factors which may affect domestic and foreign prices (e.g. Sharma and Setia, 2015). On the other hand, some others argue that volatility of real exchange rate poses real return and profit risk for traders in the long run if not in short run.…”

Section: The Data and Measuring Exchange Rate Volatilitymentioning

confidence: 99%

Exchange rate volatility and exports from India: a commodity-level panel data analysis

Sharma

2019

JFEP

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Purpose This study aims to examine the relationship between exchange rate risk and export at commodity level for the Indian case. Design/methodology/approach The monthly panel data used for analysis are at a disaggregated level, which cover around 100 products, encompassing all merchandize sectors for the period spanning from 2012:12 to 2017:11. To measure the exchange rate volatility, the authors use real as well as nominal exchange rate concepts and predict the volatility of exchange rate using the autoregressive conditional heteroscedastic-based model. They use pooled mean group, mean group and common correlated effects mean group estimator that is suitable for the objectives and data frequency. Findings The empirical analysis indicates both short- and long-term negative effects of exchange rate variations on exporting. Specifically, in the long run, real exchange rate as well as nominal exchange rate volatility has significant effects on export performance, yet, the effects of uncertainty of nominal exchange rate is much severe and intense. In the short run, it is the nominal exchange rate uncertainty that hurts exports from India. Nevertheless, the short-run effect is much lesser than the long-run, supporting the argument that the short-term exchange rate risk can be hedged, at least partially, through financial instruments; however, uncertainty of the long-term horizon cannot be hedged easily and cost-effectively. Practical implications Reducing uncertainty and attaining stability in exchange rate and price level should be an important policy objective in developing countries such as India to achieve higher export growth, both in the short and long run. Originality/value Unlike previous studies, this paper tests the relationship using micro-level data and uses advanced econometric techniques that are likely to provide more precise information regarding the association between exchange rate volatility and trade flows.

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