What is it about?
The present study examines whether the variations of the Indian rupee against the US dollar that have been observed in the market-based exchange rate regime are related to the unanticipated shocks generated through money supply process and output production of India.
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Why is it important?
As the exchange rate is sensitive to the unanticipated money, it could be possible to stabilize exchange rate to an extent, through the appropriate monetary administration. More specifically, the monetary authority may effectively control exchange rate through judicious and direct introduction of surprises in the money supply process. Performance of real sector of the economy is also important for this stabilization. Comprehensive macroeconomic policy which could stabilize real sector of the economy in general and exchange rate in particular is, therefore, essential.
Perspectives
The paper testifies exchange rate overshooting phenomenon where both unanticipated M1 and M3 cause variations and depreciation of rupee. Some evidence of the causal role of unanticipated output is observed. The rupee is found to be sensitive with both unanticipated money and output shocks where the impact of money shocks is stronger than output shocks.
Dr Biswajit Maitra
University of Gour Banga
Read the Original
This page is a summary of: MONETARY, REAL SHOCKS AND EXCHANGE RATE VARIATIONS IN INDIA, Journal of Economic Development, March 2016, The Economic Research Institute,
DOI: 10.35866/caujed.2016.41.1.005.
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