What Explains India's Real Appreciation?

 
Author/Editor: Kohli, Renu ; Mohapatra, Sudip
 
Publication Date: November 01, 2007
 
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate
 
Summary: We examine the evolution of nontradable and tradable prices in the Indian economy over 1980-2002 and find widening differentials: the real exchange rate has been appreciating. This might seem unsurprising, since India's rapid per capita income growth suggests Balassa-Samuelson factors at play. However, after 1990, the tradable-nontradable labor productivity gap, the driver of real appreciation according to Balassa-Samuelson, virtually disappeared. So what explains the real appreciation? Assessing the role of both demand and supply factors, we find that demand pressures arising from higher income growth accounted for much of the relative price increase during the post-reform period. Falling import prices also contributed significantly, along with an increase in government spending.
 
Series: Working Paper No. 07/268
Subject(s): Inflation | India | Real effective exchange rates | Exchange rate policy | Productivity

Author's Keyword(s): Tradable | nontradable | inflation | real exchange | appreciation | exchange rate policy | productivity | macroeconomic policy
 
English
Publication Date: November 01, 2007
Format: Paper
Stock No: WPIEA2007268 Pages: 50
Price:
US$18.00 (Academic Rate:
US$18.00 )
 
 
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