Skip to main content
SpringerLink
Log in

India’s Bilateral Export Growth and Exchange Rate Volatility: A Panel GMM Approach

  • Chapter
  • First Online:
Macroeconometric Methods

Abstract

This paper empirically examines the effect of real exchange rate volatility on India’s bilateral export growth. Additionally, we examine the impact of exchange rate volatility on growth in India’s exports to developed and developing countries. For this purpose, we utilize panel data of India’s twelve export trading partners, six developed (US, Hong Kong, Singapore, EZ, UK, Japan) and six developing countries (China, Indonesia, Brazil, South Africa, Malaysia and Thailand) from 2005 Q2 to 2019 Q2. We utilize panel GMM-IV technique to estimate a ‘hybrid model’ for India’s export growth. Our findings suggest that while real exchange rate volatility significantly decreases growth in India’s exports to developing countries, it has an insignificant impact on growth in India’s exports to developed countries. However, the overall effect of exchange rate volatility upon India’s export growth is found to be insignificant. Further, while we find that growth in India’s exports to both developed and developing economies is positively affected by growth in real exchange rate, foreign income, domestic income and infrastructure, it is negatively influenced by domestic demand. Our findings indicate that both demand and supply-side factors are crucial for India’s export growth.

This is a preview of subscription content, log in via an institution to check access.

Access this chapter

Log in via an institution
eBook
USD 16.99
Price excludes VAT (USA)
  • Available as EPUB and PDF
  • Read on any device
  • Instant download
  • Own it forever
Softcover Book
USD 89.99
Price excludes VAT (USA)
  • Compact, lightweight edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info
Hardcover Book
USD 119.99
Price excludes VAT (USA)
  • Durable hardcover edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info

Tax calculation will be finalised at checkout

Purchases are for personal use only

Institutional subscriptions

Notes

  1. 1.

    See Iyoha and Okim (2017).

  2. 2.

    In the first step, the countries are ranked on the basis of their average share in India’s exports of last five years (2011–2015), ten years (2006–2015) and fifteen years (2001–2015), where the average share has been calculated from the share of countries in total exports (obtained from the online database of India’s Directorate General of Foreign Trade) in each respective year. Thereafter, a common set of India’s 12 major export destinations is selected on the basis of three considerations (i) average export share of 1% or above, (ii) availability of quarterly data and (iii) robustness of fit of the model.

  3. 3.

    It is noteworthy that unlike the existing literature (such as Vo and Zhang, 2019), this study uses panel dataset of India vis-à-vis developed and developing countries.

  4. 4.

    Dua and Tuteja (2015) find significant decrease in the rate of growth of exports from India and China to US and Eurozone, respectively, during global financial crisis 2007–09 and Eurozone crisis 2010–12.

  5. 5.

    Some variables such as tariffs and expenditure on research and development are not included in the model due to the non-availability of quarterly data.

  6. 6.

    FTA is not included in the final model as the sign of this variable in different specifications estimated was not robust.

  7. 7.

    Due to problems in obtaining an appropriate price deflator for bilateral exports, several studies such as Nazlioglu (2013) use nominal value of exports rather than real exports in the analysis.

  8. 8.

    As utilized by several studies such as Shah (2013).

  9. 9.

    The unit root tests on the level variables in (1) show that while exports, real exchange rate, domestic GDP, foreign GDP, FDI and infrastructure are non-stationary of order one, exchange rate volatility and output gap are stationary. Thus, we utilize export growth, real exchange rate growth, domestic income growth, foreign income growth, infrastructure growth, exchange rate volatility and output gap in our analysis. The results of unit root tests are available from authors upon request.

  10. 10.

    India vis-à-vis six developed countries panel implies panel of India’s exports to six major developed export destinations. Similarly, India vis-à-vis developing countries panel implies panel of India’s exports to six major developing export destinations, and India vis-à-vis twelve major export destinations implies panel of India’s exports to twelve major developing and developed export destinations.

  11. 11.

    It is noteworthy that unlike the existing literature (such as Vo and Zhang, 2019), this study uses panel dataset of India vis-à-vis developed and developing countries.

  12. 12.

    Though \({\theta }_{0}\) is insignificant, its t-statistic is greater than one.

  13. 13.

    The underidentification test on each endogenous variable for all the three panels reveals that each endogenous variable is identified, i.e., all instruments utilized are relevant. The results of the underidentification test are available from the authors upon request.

  14. 14.

    The results of the Wald test are available from authors upon request.

  15. 15.

    Though \({\theta }_{0}\) is insignificant, its t-statistic is greater than one.

  16. 16.

    See Rauch (1999); Broda and Romalis (2011) and Clark et al. (2004) for details.

References

  • Akhtar, M. A., & Hilton, R. S. (1984). Exchange rate uncertainty and international trade: Some conceptual issues and new estimates from Germany and the US, Research Paper 8403. Federal Reserve Bank of New York.

    Google Scholar 

  • Ang, J. B., Madsen, J. B., & Robertson, P. E. (2015). Export performance of the Asian miracle economies: The role of innovation and product variety. Canadian Journal of Economics, 48, 273–309.

    Article  Google Scholar 

  • Armington, P. S. (1969). A theory of demand for products distinguished by place of production. IMF Staff Papers, 16, 159–178.

    Article  Google Scholar 

  • Athukorala, P. C., & Menon, J. (2010). Global production sharing, trade patterns, and determinants of trade flows in East Asia, WP 41, Asian development bank working paper series on regional integration.

    Google Scholar 

  • Bahmani-Oskooee, M., & Nouira, R. (2019). On the impact of exchange rate volatility on Tunisia’s trade with 16 partners: An asymmetry analysis. Economic Change and Restructuring, 1–22.

    Google Scholar 

  • Bahmani-Oskooee, M., & Saha, S. (2019). Exchange rate risk and commodity trade between US and India: An asymmetry analysis. Journal of the Asia Pacific Economy, 1–21.

    Google Scholar 

  • Ball, R. J. (1961). Credit restriction and the supply of exports. Manchester School Economics Social Studies, 29, 161–172.

    Article  Google Scholar 

  • Basarac Sertić, M., Vučković, V., & Škrabić Perić, B. (2015). Determinants of manufacturing industry exports in European Union member states: A panel data analysis, Ekonomska Istraživanja, 28, 384–397.

    Google Scholar 

  • Bauwens, L., Hafner, C., & Laurent, S. (2012). Volatility models. Handbook of volatility models and their applications, (pp. 1–45).

    Google Scholar 

  • Bhanumurty, N. R., & Sharma, C. (2013). Does weak rupee matter for India’s manufacturing exports, WP 115, National Institute of Public Finance and Policy.

    Google Scholar 

  • Breitung, J., & Das, S. (2005). Panel unit root tests under cross-sectional dependence. Statistica Neerlandica, 59, 414–433.

    Article  Google Scholar 

  • Broda, C., & Romalis, J. (2011). Identifying the relationship between trade and exchange rate volatility. In Commodity prices and markets. University of Chicago Press.

    Google Scholar 

  • Cheung, Y. W., & Sengupta, R. (2013). Impact of exchange rate movements on exports: An analysis of Indian non-financial sector firms. Journal of International Money and Finance, 39, 231–324.

    Article  Google Scholar 

  • Chinn, M. D., & Ito, H. (2006). What matters for financial development? Capital controls, institutions, and interactions. Journal of Development Economics, 81, 163–192.

    Article  Google Scholar 

  • Chit, M. M., Rizov, M., & Willenbockel, D. (2010). Exchange rate volatility and exports: New empirical evidence from the emerging East Asian economies. The World Economy, 239–263.

    Google Scholar 

  • Choi, I. (2001). Unit root tests for panel data. Journal of International Money and Finance, 20, 249–272.

    Article  Google Scholar 

  • Clark, M. P. B., Wei, S. J., Tamirisa, M. N. T., Sadikov, M. A. M., & Zeng, L. (2004). A new look at exchange rate volatility and trade flows, occasional paper 235. International Monetary Fund.

    Google Scholar 

  • Clark, P. B. (1973). Uncertainty, exchange risk, and the level of international trade. Western Economic Journal, 11, 302–313.

    Google Scholar 

  • De Grauwe, P. (1988). Exchange rate variability and the slowdown in growth of international trade. IMF Staff Papers, 35, 63–84.

    Article  Google Scholar 

  • Dellas, H., & Zilberfarb, B. Z. (1993). Real exchange rate volatility and international trade: A reexamination of the theory. Southern Economic Journal, 641–647.

    Google Scholar 

  • Demers, M. (1991). Investment under uncertainty, irreversibility and the arrival of information over time. Review of Economic Studies, 58, 333–350.

    Article  Google Scholar 

  • Driscoll, J. C., & Kraay, A. (1998). Consistent covariance matrix estimation with spatially dependent panel data. Review of Economics and Statistics, 80, 549–560.

    Article  Google Scholar 

  • Dua, P., & Banerji, A. (2001). A leading index for India’s exports, study 23. Development Research Group, Reserve Bank of India.

    Google Scholar 

  • Dua, P., & Tuteja, D. (2015). Global recession and Eurozone debt crisis: Impact on exports of China and India, WP 242, CDE-DSE.

    Google Scholar 

  • Eaton, J., & Kortum, S. (2002). Technology, geography and trade. Econometrica, 70, 1741–1779.

    Article  Google Scholar 

  • Edwards, L., & Alves, P. (2006). South Africa’s export performance: Determinants of export supply. South African Journal of Economics, 74, 473–500.

    Article  Google Scholar 

  • Elliott, G., Rothenberg, T. J., & Stock, J. H. (1996). Efficient tests for an autoregressive unit root. Econometrica, 64, 813–836.

    Article  Google Scholar 

  • Esteves, P., & Rua, A. (2015). Is there a role for domestic demand pressure on export performance. Empirical Economics, 49, 1173–1189.

    Article  Google Scholar 

  • Fosfuri, A., Motta, M., & Ronde, T. (2001). Foreign direct investment and spillovers through workers’ mobility. Journal of International Economics, 53, 205–222.

    Article  Google Scholar 

  • Franke, G. (1991). Exchange rate volatility and international trading strategy. Journal of International Money and Finance, 10, 292–307.

    Article  Google Scholar 

  • Grier, K. B., & Smallwood, A. D. (2013). Exchange rate shocks and trade: A multivariate GARCH-M approach. Journal of International Money and Finance, 37, 282–305.

    Article  Google Scholar 

  • Gupta, S. D., Raychaudhuri, A., & Haldar, S. K. (2015). Determinants of exports of information technology in India: An empirical analysis. South Asia Economic Journal, 16, 64–81.

    Article  Google Scholar 

  • Hadri, K. (2000). Testing for stationarity in heterogeneous panel data. Econometrics Journal, 3, 148–161.

    Article  Google Scholar 

  • Haile, M. G., & Pugh, G. (2013). Does exchange rate volatility discourage international trade? A meta-regression analysis. The Journal of International Trade and Economic Development, 22, 321–350.

    Article  Google Scholar 

  • Hall, S., Hondroyiannis, G., Swamy, P. A. V. B., Tavlas, G., & Ulan, M. (2010). Exchange rate volatility and export performance: Do emerging market economies resemble industrial countries or other developing countries. Economic Modelling, 27, 1514–1521.

    Article  Google Scholar 

  • Hodrick, R. J., & Prescott, E. C. (1997). Postwar US business cycles: An empirical investigation. Journal of Money, Credit and Banking, 29, 1–16.

    Article  Google Scholar 

  • Hooy, C. W., Law, S. H., & Chan, T. H. (2015). The impact of renminbi real exchange rate on ASEAN disaggregated exports to China. Economic Modelling, 47, 253–259.

    Article  Google Scholar 

  • Hsiao, C. (2014). Analysis of panel data, No. 54, Cambridge University Press.

    Google Scholar 

  • Iyoha, M., & Okim, A. (2017). The impact of trade on economic growth in ECOWAS countries: Evidence from panel data. CBN Journal of Applied Statistics, 8, 23–49.

    Google Scholar 

  • Jongwanich, J. (2007). Determinants of export performance in East and Southeast Asia, WP 106, Asian Development Bank.

    Google Scholar 

  • Joshi, V., & Little, I. M. D. (1994). India: Macroeconomics and political economy 1964–1991. Washington and Oxford University Press.

    Book  Google Scholar 

  • Lee, J., & Strazicich, M. C. (2003). Minimum lagrange multiplier unit root test with two structural breaks. Review of Economics and Statistics, 85, 1082–1089.

    Article  Google Scholar 

  • Marc, A., & Ruta, M. (2013). The relationship between exchange rates and international trade: A literature review. World Trade Review, 12, 577–605.

    Article  Google Scholar 

  • Markusen, J. R. (1984). Multinational, multi-plant economies and the gains from trade. Journal of International Economics, 16, 205–266.

    Article  Google Scholar 

  • Nayak, S., Aggarwal, V., & Mann, P. (2013). India’s manufacturing export dynamics: An analysis of technology intensity transition, WP 6, Centre for WTO Studies.

    Google Scholar 

  • Nazlioglu, S. (2013). Exchange rate volatility and Turkish industry-level export: Panel cointegration analysis. The Journal of International Trade and Economic Development: an International and Comparative Review, 22, 1088–1107.

    Article  Google Scholar 

  • Newey, W. K., & West, K. D. (1987). Hypothesis testing with efficient method of moments estimation. International Economic Review, 777–787.

    Google Scholar 

  • Ng, S., & Perron, P. (2001). Lag length selection and the construction of unit root tests with good size and power. Econometrica, 69, 1519–1554.

    Article  Google Scholar 

  • Nicita, A. (2013). Exchange rates, international trade and trade policies. Policy issues in international trade and commodities, No. 56, UNCTAD Study Series.

    Google Scholar 

  • Panda, S., & Mohanty, R. (2015). Effects of exchange rate volatility on exports: Evidence from India. Economics Bulletin, 35, 305–312.

    Google Scholar 

  • Pant, M., & Paul, A. (2018). The role of regional trade agreements: In the case of India. Journal of Economic Integration, 33, 538–571.

    Article  Google Scholar 

  • Pedroni, P. (2000). Fully modified OLS for heterogeneous cointegrated panels. In Advances in econometrics: Nonstationary panels, panel cointegration and dynamic panels (Vol. 15, pp. 93–130).

    Google Scholar 

  • Pesaran, M. H. (2004). General diagnostic tests for cross section dependence in panels, discussion paper 1240, IZA Discussion Papers.

    Google Scholar 

  • Pesaran, M. H. (2007). A simple panel unit root test in the presence of cross section dependence. Journal of Applied Econometrics, 22, 265–312.

    Article  Google Scholar 

  • Raissi, M., & Tulin, V. (2015). Price and income elasticity of Indian exports—The role of supply-side bottlenecks, WP 161, IMF.

    Google Scholar 

  • Rauch, J. E. (1999). Networks versus markets in international trade. Journal of International Economics, 48, 7–35.

    Article  Google Scholar 

  • Sahoo, B. K., Nauriyal, D. K., & Mohapatar, S. (2015). Software exports from India: An econometric exploration. Journal of Asia-Pacific Business, 16, 274–301.

    Article  Google Scholar 

  • Shah, A. (2013). Deficit conundrums: The determinants of India’s export behavior, doctoral dissertation. Haverford College, Pennsylvania.

    Google Scholar 

  • Srinivasan, T. N. (1998). India’s export performance: A comparative analysis. In I. J. Ahluwalia, & I. M. D. Little (Eds.), India’s economic reforms and development essay for Manmohan Singh. Oxford University Press.

    Google Scholar 

  • Srinivasan, P., & Kalaivani, M. (2012). Exchange rate volatility and export growth in India: An empirical investigation, MPRA Paper 43828. University Library of Munich.

    Google Scholar 

  • Tenreyro, S. (2007). On the trade impact of nominal exchange rate volatility. Journal of Development Economics, 82, 485–508.

    Article  Google Scholar 

  • Truong, H. Q., Dong, C. V., & Nguyen, H. H. (2019). Determinants of trade flows and trade structure between Korea and ASEAN. East Asian Economic Review, 23, 55–88.

    Article  Google Scholar 

  • Tsen, W. H. (2014). Exchange rate volatility and international trade. Journal of Stock and Forex Trading, 3, 14–21.

    Google Scholar 

  • Vo, D. H., & Zhang, Z. (2019). Exchange rate volatility and disaggregated manufacturing exports: Evidence from an emerging country. Journal of Risk and Financial Management, 12.

    Google Scholar 

  • Wong, H. T. (2017). Exchange rate volatility and bilateral exports of Malaysia to Singapore China, Japan, the USA and Korea. Empirical Economics, 53, 459–492.

    Article  Google Scholar 

  • Wong, H. T. (2019). Volatility and bilateral exports in Malaysia. International Journal of Business and Society, 20, 605–626.

    Google Scholar 

  • Yang, G., & Gu, Q. (2016). Effects of exchange rate variations on bilateral trade with a vehicle currency: Evidence from China and Singapore. Journal of International Money and Finance, 68, 50–73.

    Article  Google Scholar 

  • Zhang, K. H. (2015). What drives export competitiveness? The role of FDI in Chinese manufacturing. Contemporary Economic Policy, 33, 499–512.

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Department of Economics, Delhi School of Economics, University of Delhi, Delhi, India

    Pami Dua

  2. Department of Economics, Lakshmibai College, University of Delhi, Delhi, India

    Ritu Suri

Authors
  1. Pami Dua
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Ritu Suri
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Ritu Suri .

Editor information

Editors and Affiliations

  1. Delhi School of Economics, University of Delhi, Delhi, India

    Pami Dua

Appendix

Appendix

See Table 6.

Table 6 Definition of variables and data sources
Full size table

Questions to Think About

  1. 1.

    This chapter uses panel GMM-IV technique to estimate the empirical model used in this chapter. What is the difference between panel FMOLS and panel GMM-IV technique?

    Hint: Panel FMOLS technique (Pedroni, 2000) is used to estimate co-integrating relationship between the variables assuming cross-sectional independence. Panel GMM-IV technique does not make any assumption about the variance–covariance matrix of residuals.

  2. 2.

    What is the advantage of using non-structural or hybrid approach over structural approach, where export demand or export supply is modeled separately?

    Hint: Specification error/omitted variable bias

  3. 3.

    Examine various methods to measure exchange rate volatility.

    Hint: Standard deviation of exchange rate, moving sample standard deviation of exchange rate levels, realized volatility, GARCH measure of volatility

    Refer: Chit et al. (2010); Bauwens et al. (2012).

Rights and permissions

Reprints and permissions

Copyright information

© 2023 The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd.

About this chapter

Check for updates. Verify currency and authenticity via CrossMark

Cite this chapter

Dua, P., Suri, R. (2023). India’s Bilateral Export Growth and Exchange Rate Volatility: A Panel GMM Approach. In: Dua, P. (eds) Macroeconometric Methods. Springer, Singapore. https://doi.org/10.1007/978-981-19-7592-9_6

Download citation

Publish with us

Policies and ethics

Search

Navigation