Monetary fundamentals and rupee-U.S.$ behaviour: an Indian evidence - pre and Post liberalisation
Abstract
The paper examines different forms of money demand functions and derives reduced for equations relating exchange rate with monetary and real fundamentals of two economies t currencies of which are being related. The paper tries to determine Indian Rupee-U.S. doll exchange rate for the period spanning 1971 to 2004. The study also analyses the mode separately for pre liberalization and post liberalization periods using Ordinary Least Square (OLS) in simple linear and partial adjustment frameworks. The empirical findings suppc the partial adjustment model for both the periods. But after liberalization, the naive stai form of the models has been found to perform better so far as the sign and significance oft parameters is concerned. Structural break is indicated in the exchange rate movements t breaking point being the year of liberalization -1991. The adverse sign of relative real output is because of externalization and supports grow theory of exchange rate which states that, with rise in growth rate, the income has depreciating, effect on currency. As a policy this can be matched with a choice of competitive technology which makes export of high value goods competitive so as to compensate for importisation of real output. The relative money supply and interest rate differential are significant determinants corresponding models, therefore, the study indicates that there should be monetary policy coordination between India and U.S. to stabilize the rupee-% exchange rate. The significance of inflation rate differential implies that domestically inflation rate targeting may be adopt in conjunction with other policies. Recent rise in rupee value is because of intense capital flow to stock market which has put pressure on rupee.
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Keywords
Monetary Fundamentals
References
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• Seth, A.K. and Shalini Panwar (2003), “Monetary Model and Exchange Rate Movements: An Empirical Study of Indian Foreign Exchange Market: 1970-1999”, LBS Journal of Management and Research, vol.1, No.1 , pp. 30-39.
• Seth, A.K. and Shalini Panwar (2006), “Understanding Rupee-Dollar Exchange Rate Movements Through Flexi-Price Monetary Modelling During the Period 1971-2004”, LBS Journal of Management and Research, vol. 4, No. 1&2, pp. 52-71.
• Somnath, V.S. (1986), ʻʻ Efficient Exchange rate forecasts: Lagged Models better than the random walk”, Journal of international money and Finance, vol.5, pp. 195-220.
• Tawadros, G. (2001), “The Predictive Power Of The Monetary Models Of Exchange Rate Determination”, Applied Financial Economics, Vol.11, pp. 279-286.
• Woo, Wing (1985), ʻʻ The Monetary Approach to Exchange Rate Determination Under Rational Expectations : The Dollar-DeutchMark Rate.ʼʼ Journal of International Economics, Vol.18, pp.1-16.
• Baillie, R.T. and D.D. Solever (1987), “Cointegration and Models of Exchange Rate Determination”, International Journal of Forecasting, Vol.3, pp. 4-52.
• Bilson, John F.O. (1978), ʻʻRecent Developments in Monetary Models of Exchange Rate Determination.ʼʼ IMF Staff Paper, Vol.24, pp.201-221.
• Boothe, Paul M., and Stephen S. Poloz (1988), ʻUnstable Money Demand and the Monetary Model of the Exchange Rate.ʼʼ Canadian Journal of Economics, (November), pp.785-798.
• Charemza, Wojciech W., and Deadman, Derck F.(1992), “New Directions in Econometric practice- General to Specific Modelling, Cointegration and Vector Autoregression”, Edward Elgar, Cheltenhaun, U.K., Lyme, US.
• Chang, Yuanchen (2004), “A Re-Examination of Variance Ratio Test of Random Walk in Foreign Exchange Rates” Applied Financial Economics, 14, pp - 671-679.
• Choudhry, Taufiq, and Phillip Lawler(1997),ʻʻThe Monetary Model of Exchange Rates: Evidence from the Canadian Float of the 1950ʼs.ʼʼ Journal of Macroeconomics, Spring,Vol.19, No.2,pp.349-362.
• Dickey, D.A., and W.A. Fuller (1979), “ Distribution of the Estimators for Autoregressive time Series with a Unit Root”, Journal of American Statistical Associatoion, Vol.74, pp.427-431.
• Ehrmann Michael, and Fratzscher Marcel (2005), “Exchange Rates and Fundamentals: New Evidence from Real-Time Data”. Journal of International Money and Finance, vol. 24, pp - 317-341.
• Eun, Cheol S., and Bruce G. Resnik (2004), “ International Financial Management,” Tata McGraw Hill publishing company Ltd., pp.116.
• Frenkel, Jacon A. (1976), ʻʻA Monetary Approach to the Exchange Rate : Doctorinal Aspects and Empirical Evidence.ʼʼ Scandinavian Journal of Economics, pp.200-224.
• Frenkel, J. (1979), “On the Mark: A Theory of Floating Exchange Rates Based on Real Interest Differential.” American Economic Review, Vol.69, pp.610-622.
• Gujrati, Demodar N. (1995), “Basic Econometrics”. International Editions, McGraw-Hill, Inc., Singapore.
• Hwang, Jae-Kwang (2003), “Dynamic Forecasting of Sticky-Price Monetary Exchange Rates Model,” American Economic Journal, vol. 31, No. 2, pp. 103-113.
• Islam, M. Faizul and Mohammad S. Hasan (2006), “The Monetary Model Of Dollar-Yen Exchange Rate Determination: A Cointegration Approach”, International Journal of Business and Economics, Vol.5, No.2, pp. 129-145.
• Johansen, S. and Juselius K. (1990), “Maximum Likelihood Estimation And Interference Cointegration – With Application To Demand For Money”, Oxford Bulletin of Economics and Statistics, Vol.52, pp.169-210.
• Johansen, S. and Juselius K. (1992), “Testing Structural Hypothesis In A Multivariate Cointegration Analysis Of The PPP And UIP For The UK”, Journal of Econometrics, Vol.53, pp.211-244.
• Johnson, H. G.( 1972), “ The Monetary Approach to Balance of Payments Theory”, Further Essays in Monetary Theory, Grorge Allen and Unwin, London.
• MacDonald, Ronald, and Mark P. Taylor (1991), ʻʻThe Monetary Approach to Exchange Rate.ʼʼ Economic Letters, 37, pp.179-185.
• MacDonald, Ronald, and Mark P. Taylor (1993), ʻʻ The Monetary Approach to Exchange Rate : Rational Expectations, Long Run Equilibrium and Forecasting.ʼʼ IMF Staff Papers, Vol.40, No.1, pp.89-107.
• Meese, R. A. (1987), “Testing for Bubbles in Exchange Markets; A Case of Sparkling Bubbles”, Journal of Political Economy, Vol. 94, pp. 345-73.
• Miyakoshi, T. (2000), “ The Monetary Approach to Exchange Rate: Empirical Observations From Korea”, Applied Economic Letters, Vol.7, pp. 791-794.
• Moersch Mathias, and Dieter Nautz (2001), ʻʻ A Note on Testing the Monetary Model of the Exchange Rate.ʼʼ Applied Financial Economics, Vol.11, pp.261-268.
• Mundell, R. A. (1968), “ International Economics”, The Macmillan company, New York.
• Mussa, M.(1979), “Empirical Regularities in the Behaviour of Exchange Rates: A Comment,”, in Karl Brunner and Allan H. Meltzer, eds., Policies for Employment, Prices, and Exchange Rates, Carnegie-Rochester Conference on Public Policy, J. Monet. Econ., Suppl. Vol.11, pp. 9-57.
• Patterson, K.D. (2000), “An Introduction to Applied Econometrics: A Time Series Approach”, St. Martinʼs Press, New York, USA.
• Perron, P. (1989), ʻʻThe Great Crash, The Oil Shock, and the Unit Root Hypothesisʼʼ, Econometrics, 57, pp. 1361-1401.
• Rapach, David E., and Mark E. Wohar (2002), “Testing the Monetary Model of Exchange Rate Determination: New Evidence from a Century of Data,” Journal of International Economics, vol. 58, pp. 359-385.
• Seth, A.K. and Shalini Panwar, (2002), “Reduced Form Monetary Model and Exchange Rate Movements: An Empirical Study of Indian Foreign Exchange Market – 1971:1 – 2000:4”, Review of Commerce Studies, vol. 20-21, No. 2, pp – 67-93.
• Seth, A.K. and Shalini Panwar (2003), “Monetary Model and Exchange Rate Movements: An Empirical Study of Indian Foreign Exchange Market: 1970-1999”, LBS Journal of Management and Research, vol.1, No.1 , pp. 30-39.
• Seth, A.K. and Shalini Panwar (2006), “Understanding Rupee-Dollar Exchange Rate Movements Through Flexi-Price Monetary Modelling During the Period 1971-2004”, LBS Journal of Management and Research, vol. 4, No. 1&2, pp. 52-71.
• Somnath, V.S. (1986), ʻʻ Efficient Exchange rate forecasts: Lagged Models better than the random walk”, Journal of international money and Finance, vol.5, pp. 195-220.
• Tawadros, G. (2001), “The Predictive Power Of The Monetary Models Of Exchange Rate Determination”, Applied Financial Economics, Vol.11, pp. 279-286.
• Woo, Wing (1985), ʻʻ The Monetary Approach to Exchange Rate Determination Under Rational Expectations : The Dollar-DeutchMark Rate.ʼʼ Journal of International Economics, Vol.18, pp.1-16.
How to Cite
Seth, A. K., and Shalini Panwar. 2007. “Monetary Fundamentals and Rupee-U.S.$ Behaviour: An Indian Evidence - Pre and Post Liberalisation”. Studies in Business and Economics 13 (2). https://doi.org/10.29117/sbe.2007.0037.
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