Real Exchange Rate Volatility and its Impact on Exports : An Evidence From India

In our study we have empirically derived volatility by calculating the standard deviation of moving average of log of real effective exchange rates (RER). We have further examined the effect of real exchange rate volatility on the exports of the Indian economy from the year 2001 to 2017 respectively and used a modified model developed by Goldstain and kahan. Normalcy test using Shapiro Wilk test has been conducted and to avoid spurious regression analysis the data has been checked for stationarity with the help of Durbin Watson (DW) Test and Augmented Dickey Fuller test. Further the data has been differenced to obtain results of impact of mainly RER, Relative Prices and GDP on Indian exports. The results conclude that volatility is not normally distributed and the DW test value is lower than the effective R square value. The data at level was non stationary and with the help of ADF test we concluded that when differenced by order one < I(1)> they became stationary and significant regression output was achieved. GDP and RER had a significant impact on exports and hence the research continued with the impacting variables to further judge their two-way and three-way causality. The long run association between the data is tested with the help of Johansen's Cointegration test and the results suggested that there is no long run causality between them. Following the result instead of the Vector Error correction model we have applied the Vector Autoregressive model (VAR) to further establish causality in the short run and also evaluate three way causality between Indian exports, Gross Domestic Product and real exchange rate volatility with the help of Granger Casualty test. The variables have causal impact two way and three way (specified variables) when it comes to volatility and exports. The specified time period is from 2001 to 2017 respectively. Introduction The unpredictable nature of exchange rates has traditionally received quiet attention in the various researches concerning economic studies. The volatility is commonly observed to have a negative relationship with international trade however theoretical calculations, predictions and empirical results appear to be mixed yet the balance seems to tilt in favor of this insight and perception. The interdependence amongst countries in this epoch of globalized world with reference to international trade of goods, services, capital flows and many more has increased considerably. There is a substantial alteration in the trade composition of the emerging economies of the world with an outstanding shift from exporting commodity to manufacturing product exports. The growth rate of especially developing economies predominately depends on the real exchange rate and this statement definitely owes to a major increase in international trade events. The trade of emerging countries has considered to be pretty moderate especially after comparing with the developed countries. The emerging countries in its sequence of development and growth are very reactive to their trade characters and their structure has made their terms of trade steady yet profound to exchange rate fluctuations specifically their exports. Bretton woods collapsed and was accompanied by the change of exchange rates system from Real Exchange Rate Volatility and its Impact on Exports : An Evidence From India