Abstract
This study examines the short-run and long-run effects of real exchange rate changes on India’s trade balance vis-à-vis four of her major trading partners, viz., the US, the UK, Japan and Germany within a cointegrating vector error correction model. Cointegration estimates suggest a long-run equilibrium relationship among trade balance, real exchange rate, domestic and foreign income in each country. This study also applied generalized impulse response functions to trace the effect of a one-time shock to the real exchange rate on trade balance. Although considerable variations exists in the results, overall, the generalized impulse response functions suggest that J-curve effect is visible in India’s bilateral trade with both Japan and Germany, but the Marshall-Lerner condition appears to hold in the context of India-Germany trade. On the contrary, we did not get J-curve in India’s trade with the US, and the UK, rather we got S-curve effect in India-UK trade.
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