Income and Exchange Rate Elasticity of Imports and Exports

35 Pages Posted: 28 Dec 2005

See all articles by Sandeep Ramesh

Sandeep Ramesh

affiliation not provided to SSRN

Deepak Garg

affiliation not provided to SSRN

Date Written: April 2005

Abstract

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

Suggested Citation

Ramesh, Sandeep and Garg, Deepak, Income and Exchange Rate Elasticity of Imports and Exports (April 2005). Available at SSRN: https://ssrn.com/abstract=871740 or http://dx.doi.org/10.2139/ssrn.871740

Sandeep Ramesh

affiliation not provided to SSRN ( email )

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Deepak Garg (Contact Author)

affiliation not provided to SSRN ( email )

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