Long run Determinants of Real Exchange Rate: An Empirical Investigation

Abstract

This paper aims to investigate the determinants of real exchange rate, using quarterly Indian data covering the period from 1978Q4 to 2013Q4. The study employs Johansen cointegration analysis in estimating the long run determinants of real exchange rate. The empirical results suggested that the real exchange rate is influenced by foreign exchange reserves, government consumption and openness. Granger Causality of Vector Error Correction Model results suggested that there is long run unidirectional causality running from foreign exchange reserves to real effective exchange rate, government consumption and trade openness. There is also a unidirectional causality running from openness to real effective exchange rate, foreign exchange reserves and government consumption.