Direction of Trade, Exchange Rate Regimes, and Financial Crises: The Indian Case

Rajendra Narayan Paramanik () and Bandi Kamaiah ()
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Rajendra Narayan Paramanik: University of Hyderabad
Bandi Kamaiah: University of Hyderabad

Chapter 6 in Analytical Issues in Trade, Development and Finance, 2014, pp 87-96 from Springer

Abstract: Abstract This chapter focuses on the direction of trade (DOT) of India with its selected major 25 trade partners during the years 1997–1998 to 2009–2010 with the help of the empirically acclaimed and successful gravity model of trade. To address issues like heterogeneous impact of the trading partners on the trade volume of India, the panel-corrected standard error (PCSE) model has been used. Apart from the influence of traditional factors like gross domestic product (GDP), population, and spatial distance (proxy for transaction cost), significant impacts of the financial crises and exchange rate regimes of the trading partners are tested. The expected positive roles of GDP and population of India as well as its trade partners have been vindicated. However, the negative impact of distance is not statistically discernible. Two major financial crises (Asian crisis in 1998 and the recent meltdown in 2008) that occurred during this phase played havoc in terms of their impact on India’s trade relation. Though, in absolute terms, advanced nations with freely floating exchange rate system trade more with India, a proportional impact of the nations with fixed exchange peg or exchange rate arrangement with no legal tender has been found to be more prominent.

Keywords: Direction of trade of India; Panel-corrected standard error (PCSE) model; Exchange rate regimes; Asian crisis in 1998; Global meltdown in 2008; Gravity model; European Economic Community (EEC); Free trade agreements (FTAs); Asia-Pacific region; India’s trade potential; Volatility of exchange rate; Newton’s gravity law; Regional or bilateral trade agreements; Hausman test; Cross-sectional heteroscedasticity; Panel data; Modified Wald test; Pesaran’s test; PCSE Model; Dummy variable; Crawling peg; US housing market crash (2008) (search for similar items in EconPapers)
Date: 2014
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DOI: 10.1007/978-81-322-1650-6_6

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