An Empirical Analysis of Aggregate Import Demand Function for India

Abstract

This paper examines the behaviour of Indian aggregate imports during the period 1980–81 to 2013–14. The stability of aggregate import demand function is examined using five types of cointegration tests including the ARDL bounds test. In order to estimate the long-run elasticities, we have applied three alternative fully efficient cointegrating regressions, autoregressive distributed lag (ARDL) model and Johansen maximum likelihood method. Our results reveal cointegration relationship between import demand, relative prices of import, domestic activity and foreign exchange reserves. Results evince that, in the long-run, the response of import demand to relative import prices is negative and less than unity, whereas it’s response to domestic activity/income is positive and more than unity. The foreign exchange reserve has a positive effect on imports.