Biography
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Conference contributions 1
EXCHANGE RATE DYNAMICS AND BILATERAL TRADE BALANCE ADJUSTMENT IN INDIA:
Revisiting the j-curve hypothesis
The J-curve hypothesis has been used in long time to analyze the relationship between the exchange rate fluctuations and adjustment in trade balance especially in developing economies. This paper re-tests the existence of the bilateral J-curve effect in the case of India in monthly data and in a multivariate time-series model that both accounts for the short-run dynamics and the long-run relationships. The evaluation is based on the bilateral trade of India, with the 5 top trading partners, namely the United States, China, Japan, Germany, and the United Arab Emirates during the years 1991-2024. Unit-root tests, Johansen cointegration tests and Vector Error Correction Models are utilized where they are statistically and diagnostically appropriate. The findings suggest that bilateral trade relations of India do not depict a strong/systematic J-curve effect. There is also long-run cointegration of the limited number of trading partners and no long-run consistent relationship between the real exchange rate and the trade balance of China and Japan. Even though cointegration is found to be the case in Germany, the instability of the parameters is indeed high, due to probable macroeconomic and structural shocks within the Eurozone, which restricts the accuracy of the dynamic VECM estimation. In the case of the United Arab Emirates and the United States, there are weak and statistically insignificant adjustment dynamics at the error-correction mechanisms and impulse response analyses after the exchange rate shocks. Altogether, the results indicate that the adjustment mechanisms, based on exchange rates, have a minor impact on the bilateral balance of the Indian trade, and the structural factors prevail in the dynamics of trade. These findings have significant implications to the exchange rate management and other external sector policy in India.