Income and Exchange Rate Elasticity of Imports and Exports
35 Pages Posted: 28 Dec 2005
Date Written: April 2005
This paper examines the income and exchange rate elasticities of imports and exports for India. We use annual time series data to estimate the Import and Export demand functions for India to investigate income and exchange rate elasticities. Due to non-stationarity of data series used in the estimation (as verified by Augmented-Dickey-Fuller [ADF] test) Johansen Co-integration Test is used to establish the cointegration between hypothesized multi-variate log-linear import and export demand function. The cointegration coefficients are estimated using the Vector Error Correction Model [VECM]. Although considerable variations exist in the results, exchange rate elasticity of imports and exports suggest that Marshall-Lerner condition does not hold in India at present. Varying degree of J-curve effects are seen in the case of devaluation of Rupee [1966 & 1991]. Income elasticity of imports establishes that Elasticity Puzzle does not exist in the case of India. These results are contrary to the existing empirical studies. The observed statistics have been intuitively reasoned in light of India's current macroeconomic scenario.
Keywords: J-curve, india, Marshall-lerner condition, income elasticity, exchange rate elasticity, imports exports
JEL Classification: F41
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