Causal Relationships between Industrial Production, Interest Rate and Exchange Rate: Evidence on India
11 Pages Posted: 28 Dec 2005
Date Written: August 2005
This paper attempts to examine the causal relationships between Industrial Production, Interest Rate and Exchange Rate in India. The study uses Granger's Causality test and Vector Auto Regression technique on monthly IIP (Index of Industrial Production), exchange rate, and interest rate for the period April 1992 to March 2004. The major findings of the study are (a) there exists a unidirectional causality between the exchange rate and interest rate and between the exchange rate return and IIP; (b) there is no Granger's causality between the interest rate and IIP. Through Vector Auto Regression modeling, the study confirms the results obtained from Granger's Causality test. It shows that interest rate and IIP depend on the exchange rate and there is no relationship between interest rate and IIP.
Keywords: Industrial Production, Interest Rate, Exchange Rate, Granger's Causality, Vector Autor Regression
JEL Classification: F41
Suggested Citation: Suggested Citation