Oil Price, Exchange Rate and the Indian Macroeconomy

Ghosh, Taniya (2016): Oil Price, Exchange Rate and the Indian Macroeconomy. Published in: Economic and Political Weekly , Vol. 40, No. vol lI (1 October 2016): pp. 55-62.

Abstract

General discussions on the Indian macroeconomy have centred on two things in the recent past: the impact of depreciation of rupee and the effects of falling world oil prices. Using the structural vector autoregressive approach, the dynamic relationship between movements in oil prices and exchange rates with macroeconomic variables like price, output, interest rate and money are investigated. Additionally, a comparative analysis is conducted to show how each of these structural shocks has historically affected price, output and exchange rate. The results show strong link among these variables. Three results have important policy implications: (i) the world price of oil has a great potential to affect India’s output, (ii) targeting depreciation of rupee to expand output may not be an effective policy tool for the RBI, and (iii) variation in rupee’s value can have medium- to long-term impact on world price of oil.

• Item Type: MPRA Paper
• Language: English
• Keywords: Money, Structural VAR, Exchange rate, Price, Output
• Subjects: E - Macroeconomics and Monetary Economics > E0 - General; E - Macroeconomics and Monetary Economics > E0 - General > E00 - General; F - International Economics > F0 - General

References

Agenor, P. R. (1991): “Output, Devaluation and the Real Exchange Rate in Developing Countries,” Weltwirtschaftliches Archiv Bd 127, H 1, pp 18–41.

Barnett W. A., Bhadury S. S. and Ghosh, T.(2016): “An SVAR Approach to Evaluation of Monetary Policy in India: Solution to the E xchange Rate Puzzles in an Open Economy,” Open Economics Review,2 July,pp 1–23.

Bjørnland,H. C.(2000):“Effect of Aggregate Demand, Supply and Oil Price Shocks,” The Manchester School, Vol 68, No 5, pp 578–607.

Bjørnland,H. C.(2009): “Oil Price Shocks and Stock Market Booms in an Oil Exporting Country,” Scottish Journal of Political Economy, Vol 56, No 2, pp 232–54.

Bjørnland, H. C., Kamin S. B. and Rogers, J. J.(1997):“Output and the Real Exchange Rate in Developing Countries: An Application to Mexico,” International Finance Discussion Paper No 580,Federal Reserve Bank.

Darby, M. R.(1982):“The Price of Oil and World Inflation and Recession,” American Economic Review,Vol 72,No 4,pp 738–51.

Doan, T.(2013): RATS Manual, Version 8.3, Estima, Evanston, IL.

Dornbusch, R.(1988): Open Economy Macroeconomics, 2nd edition, New York.

Guitian, M.(1976): “The Effects of Changes in the Exchange Rate on Output, Prices and the Balance of Payments,” Journal of International Economics, Vol 6, No 1, pp 65–74.

Hamilton, J. D.(1983): “Oil and the Macroeconomy since World War II,” Journal of Political Economy,Vol 91, No 2,pp 228–48.

Hamilton, J. D.(1996): “This Is What Happened to the Oil Price-macroeconomy Relationship,” Journal of Monetary Economics, Vol 38, No 2, pp 215–20.

Hidhayathulla, A. and Mahammad, R. B.(2014): “Relationship between Crude Oil Price and Rupee,Dollar Exchange Rate: An Analysis of Preliminary Evidence,” IOSR Journal of Economics and Finance,Vol 3,No 2,pp 1–4.

Kaushik,N.,Nag, R. and Upadhyaya, K. P.(2014):“Oil Price and Real Exchange Rate: The Case of India,” International Business and Economics Research Journal, Vol 13, No 4.

Kamin, S. B. and Rogers, J. J.(1997): “Output and the Real Exchange Rate in Developing Countries: An Application to Mexico,” FRB International Finance Discussion Paper No 580.

Kim, S. and Roubini, N.(2000): “Exchange Rate Anomalies in the Industrial Countries: A Solution with a Structural VAR Approach,” Journal of Monetary Economics, Vol 45, No 3, pp 561–86.