Do Exchange Rates Affect Exports in India?

Abstract

It is shown that the 36 country real effective exchange rate (REER) of India, which is I(1), becomes stationary once a single exogenous shock (corresponding to the implementation of the liberalization policy by the government of India) is separated from its stochastic component and modelled as a break in the deterministic trend. The implication of this for the export supply function is enormous. While without the break real export has a long-run relationship with REER and gross domestic product, with the break the relationship no more exists. JEL Classification: F31, C32, F41