Patterns of Misalignment Between Performance of Fundamental Variables and Exchange Rate Determination in a Globalized World

Abstract

In this comparative study, we attempted to trace the pattern of misalignment in exchange rate with respect to the movement of fundamental variable of the respective countries by using annual observations over the period of 27 years from 1991 to 2017. This study includes four models in which we assess the pattern of misalignment of exchange rate with respect to the movement of GDP, interest rate, inflation and current account balance in India, China, and the USA using fixed-effect LSDV model. The base theory of the study is short-run and long-run theory of exchange rate in order to identify the fundamental variable that effect exchange rate. We analyse the factors like interest rate, productivity, inflation rate, current account balance of all the three economies are important factors of exchange rate that trace misalignment in exchange rate and explain the exchange rate dynamics to a large extent. We observed that these factors are not so significant for the developed economies and significant to some extent in India.