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The Sources of Real Exchange Rate Fluctuations in India

TOMOE MOORE and ERIC J. PENTECOST
Indian Economic Review
New Series, Vol. 41, No. 1 (January-June 2006), pp. 9-23
Stable URL: http://www.jstor.org/stable/29793852
Page Count: 15
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Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
The Sources of Real Exchange Rate Fluctuations in India
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Abstract

This paper examines the contributions of real (permanent) and nominal (temporary) shocks on the nominal and real exchange rates of the Indian Rupee against the US dollar in the period since 1993, using the long-run structural VAR technique. If nominal shocks account for most of the movement in the real exchange rate then the authorities can use monetary policy to influence the competitiveness of the economy. On the other hand, if real shocks account for most of the variation in the real exchange rate the Purchasing Power Parity (PPP) hypothesis is invalid and monetary policy ineffective as a tool of exchange rate management. The paper finds that the real exchange rate of the Rupee against the US dollar is non-stationary and that real shocks have permanent effects on the exchange rate, thus making exchange rate management at best futile and possibly harmful to the economy.

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