The Effect of Coronavirus Pandemic on the Rupee Dollar Exchange Rate

Ranajoy Bhattacharyya () and Ripudaman Bhardwaj ()
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Ranajoy Bhattacharyya: Indian Institute of Foreign Trade (IIFT), Kolkata
Ripudaman Bhardwaj: Indian Institute of Foreign Trade (IIFT), Kolkata

No 2264, Working Papers from Indian Institute of Foreign Trade

Abstract: In this paper, we use the “news” (unanticipated information) model of short-term exchange rate fluctuations (Frenkel, 1994) to determine the effect of the Coronavirus pandemic on the rupeedollar exchange rate. We analyse the exact nature of the pandemic’s impact by incorporating the news model in a Markov Switching regression setup and comparing them with (a) the prepandemic and (b) the post-onset of the pandemic data without news. Our main result suggests that the pandemic induced a transition from a lower mean and volatility rupee/dollar regime to a higher mean and volatility regime. Other significant observations include (1) the news of the pandemic played a statistically significant role both in the evolution of the series during the pandemic and as control variables in the regime estimates (2) the expected duration of the regimes was reduced significantly (by 166 and 26 days) during the pandemic with marginal changes in transition probabilities and (3) inclusion of the statistically significant news controls change these durations almost to pre-pandemic levels. Results (2) and (3) and regime transition graphs suggest that the pandemic affected the evolution of the series through a few episodic interventions in its mean–volatility regimes.

Keywords: Coronavirus; rupee-dollar exchange rate; news model; regime change. (search for similar items in EconPapers)
JEL-codes: F31 G14 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2022
New Economics Papers: this item is included in nep-bec, nep-eff, nep-ict, nep-int and nep-sbm
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