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posted on 14.07.2005by Sushanta K. Mallick, Helena Marques
This paper uses panel data to analyse the extent to which the prices of India's imports and exports in nine product groups react to exchange rate changes before (1980-1990) and (1991-2001) a change in policy that included the option of a flexible exchange rate regime and an acceleration of trade liberalisation. It finds that for all the nine groups of Indian industries the null hypothesis of complete pass-through from exchange rate changes into import prices cannot be rejected. On the contrary, the results suggest that Indian exporters appear to have to some degree passed through exchange rate changes into import prices into foreign currency export prices in three industry groups in the 1980s and in six groups of industries in 1990s. The increase in the number of sectors exhibiting some degree of pass-through in the 1990s, relative to the 1980s, may be partly attributable to the elimination of currency and trade controls. Whilst the pass-through into import prices does not exhibit a structural break aronund 1991, a Chow test revealed the existence of such structural break in pass-through into export prices. The pass-through to import prices seems to be exogenous (determined by external factors), but the pass-through to export prices appears to be enogenous (driven by internal factors, mostly trade and exchange rate policies).