Economics at your fingertips  

Exchange rate misalignment and economic growth in India

Vaseem Akram and Badri Rath ()

Journal of Financial Economic Policy, 2017, vol. 9, issue 4, 414-434

Abstract: Purpose - The purpose of the paper is to examine the impact of exchange rate misalignment on economic growth in India using annual data from 1980 to 2014. Design/methodology/approach - First, misalignment is measured, which is defined as the deviations of the actual real exchange rate (RER) from its equilibrium level. The equilibrium real exchange rate (ERER) is estimated using the auto-regressive distributed lag (ARDL) model by considering key macroeconomic fundamentals of the determinants of RER. Zivot and Andrews’ unit root with structural break is used to test the stationarity property of data. The impact of exchange rate misalignment on economic growth has been examined using ARDL and variance decomposition techniques. Findings - Our results find an overvaluation of the exchange rate till 2000, and thereafter, an undervaluation of the exchange rate prevails in India. Further, the result indicates that an increase in exchange rate misalignment leads to a decrease in economic growth and vice versa. Moreover, a positive misalignment (overvaluation) hurts the economic growth and a negative misalignment (undervaluation) promotes the economic growth. Research limitations/implications - From the policy perspective, the results highlight that India needs to maintain an appropriate exchange rate which can reduce the RER misalignment. It is better for the Reserve Bank of India (RBI)’s intervention to smoothen the fluctuations of the exchange rate to avoid the inefficiency in the allocation of resources. However, to minimize the RER misalignment, the intervention should be conducted only in the short run. Originality/value - The study contributes to the existing literature by estimating the exchange rate misalignment for India and its impact on economic growth.

Keywords: Econometric modelling; International economics; Economic growth of open economies (search for similar items in EconPapers)
Date: 2017
References: Add references at CitEc
Citations: View citations in EconPapers (2) Track citations by RSS feed

Downloads: (external link) ... RePEc&WT.mc_id=RePEc (text/html)
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Ordering information: This journal article can be ordered from
Emerald Group Publishing, Howard House, Wagon Lane, Bingley, BD16 1WA, UK

Access Statistics for this article

Journal of Financial Economic Policy is currently edited by James Barth and John Jahera

More articles in Journal of Financial Economic Policy from Emerald Group Publishing
Bibliographic data for series maintained by Virginia Chapman ().

Page updated 2021-09-14
Handle: RePEc:eme:jfeppp:jfep-12-2016-0093