Proceedings of 3rd Asia-Pacific Business Research Conference
25 - 26 February 2013, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-19-1
Relationship between Current Account balance and Real
Exchange Rate: Analysis of J-curve for India
Ankit Jaini
This paper tries to test the J-curve hypothesis and analyses
the effect of real effective exchange rate volatility on the
balance of trade in India. This paper also tries to investigate
whether increase in GDP increases current account balance
or not. The model is estimated on quarterly data from 2000:01
to 2010:02 and the exchange rate is measured alternatively in
terms of the trade weighted real effective exchange rate. The
model variables are tied together in a long run equilibrium
relationship. The study finds no evidence of the J-curve effect
in the balance of trade for India i.e. exchange rate volatility
does not play any significant role in affecting the balance of
trade in India. Johansen’s approach is used for long-run
estimates showing that real depreciation improves current
account. Corresponding error-correction models indicate that,
following currency depreciation, current account does not
deteriorate before it later improves, i.e. does not exhibit the Jcurve pattern.
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Ankit Jaini, M.Sc. (Integrated) Economics, Department of Humanities and Social Sciences, Indian Institute
of Technology (IIT) Kanpur, India . Email : ajaini@iitk.ac.in