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Transmission Mechanism of Exchange Rate Pass-through in India

Author

Listed:
  • Rucha R. Ranadive
  • L.G. Burange

Abstract

The degree of transmission of the exchange rate fluctuations to domestic prices manoeuvres the monetary policy actions in order to contain the inflationary pressure on the economy. The study intends to analyze the exchange rate pass-through to import and domestic prices in India after the global financial crisis applying unrestricted VAR model and innovation accounting tools such as impulse response functions and variance decomposition. The empirical study has been undertaken from April 2009 to May 2013 considering eight variable VAR consisting of oil prices, output gap, the exchange rate, interest rate, money supply, import prices, wholesale prices and consumer prices in India. Incomplete pass-through to import and domestic prices has been encountered and the transmission of pass-through declines along the distribution chain of pricing. The magnitude of pass-through is high for import prices and moderate to wholesale and consumer prices. The variance decomposition results reveal that industrial output, interest rate and money supply impact domestic prices to a greater extent in India.

Suggested Citation

  • Rucha R. Ranadive & L.G. Burange, 2015. "Transmission Mechanism of Exchange Rate Pass-through in India," Foreign Trade Review, , vol. 50(4), pages 263-283, November.
    • Handle: RePEc:sae:fortra:v:50:y:2015:i:4:p:263-283
    DOI: 10.1177/0015732515598589
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    More about this item

    Keywords

    Exchange rate pass-through; prices; VAR; impulse response function; variance decomposition;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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