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

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  • Chandan Sharma
  • Rajat Setia

Abstract

Purpose - – This paper aims to examine the relationship between Indian rupee-US dollar exchange rate and the macroeconomic fundamentals for the post-economic reform period. Design/methodology/approach - – The authors have used an empirical model which includes a range of important macroeconomic variables based on the basic monetary theories of exchange rate determination. At the first stage of the analysis, they have tested structural break in the data. Subsequently, they have employed the fully modified ordinary least square, Wald’s coefficient restriction and impulse response functions (IRF) to estimate the monetary model in the long- and short-run horizons. Findings - – Results of analyses indicate that the macroeconomic fundamentals determine exchange rate in a significant way, but their effect varies sizably across the periods. The IRF illustrate the importance of interest rate in controlling exchange rate volatility. Practical implications - – The analysis of the behavior of inter-relationship among macroeconomic variables will help policymakers in a deep-rooted understanding of this complex and time-varying relationship. Originality/value - – Most of the existing studies have tested the impact of a single or a few macroeconomic fundamentals on exchange rate. But in the present study, we have tested the impact of a range of important variables, i.e. money supply, real income or output, price level and trade balance. Further, considering the importance of structural breaks in data, they authors have employed standard tests of structural break and incorporated the issue in the cointegration analysis.

Suggested Citation

  • Chandan Sharma & Rajat Setia, 2015. "Macroeconomic fundamentals and dynamics of the Indian rupee-dollar exchange rate," Journal of Financial Economic Policy, Emerald Group Publishing Limited, vol. 7(4), pages 301-326, November.
    • Handle: RePEc:eme:jfeppp:v:7:y:2015:i:4:p:301-326
    DOI: 10.1108/JFEP-11-2014-0069
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    Citations

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    Cited by:

    1. Telli, Şahin & Chen, Hongzhuan, 2020. "Structural breaks and trend awareness-based interaction in crypto markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 558(C).
    2. Sushil Kumar Rai & Akhilesh Kumar Sharma, 2023. "Forecasting Exchange Rate Volatility In India Under Univariate And Multivariate Analysis," Bulletin of Monetary Economics and Banking, Bank Indonesia, vol. 26(1), pages 175-190, March.
    3. Chandan Sharma, 2019. "Exchange rate volatility and exports from India: a commodity-level panel data analysis," Journal of Financial Economic Policy, Emerald Group Publishing Limited, vol. 12(1), pages 23-44, June.
    4. Lal, Madan & Kumar, Satish & Pandey, Dharen Kumar & Rai, Varun Kumar & Lim, Weng Marc, 2023. "Exchange rate volatility and international trade," Journal of Business Research, Elsevier, vol. 167(C).
    5. Aliyu Alhaji Jibrilla, 2016. "Fiscal sustainability in the presence of structural breaks: Does overconfidence on resource exports hurt government’s ability to finance debt? Evidence from Nigeria," Cogent Economics & Finance, Taylor & Francis Journals, vol. 4(1), pages 1170317-117, December.

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