Economic Growth, Domestic Investment, Real Exchange Rate and Trade Openness in India: A multi-cointegration analysis
DOI:
https://doi.org/10.1956/jge.v12i3.433Keywords:
trade openness, real exchange rate, gross domestic investment, cointegration and vector error correction modelAbstract
This study examines the relationships between economic growth, gross domestic investment, real exchange rate and trade openness in Indian Economy using the Johansen –Juselius cointegration test and VEC Granger causality test. The results suggest that there exists a long-run relationship among the variables. All the estimated coefficients of the long-run equation have the correct positive signs and significant at least at the 5 per cent level. Specifically, in the long run, a 1% increase in Gross Domestic Investment (GDI) increases 0.066% in economic growth. Similarly, a 1% increase in trade openness leads to 0.082% increase in economic growth and a 1% increase in real exchange rate leads to 0.26% increase in economic growth. Thus, in the long run, Gross Domestic Investment (GDI), trade openness and real exchange rate have positively impact on economic growth. The results from the VEC Granger causality test suggest that in the short run only economic growth has short run impact on Gross Domestic Investment (GDI). The other variables have no short run impact on each other. Thus, there is a unidirectional causality from economic growth to GDI, but there is no feedback effect.
References
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2. Calderon, C., Loayza, N., & SchmidtÂHebbel, K. (2004). External conditions and growth performance. Working Paper Central Bank of Chile 292, Central Bank of Chile.
3. Chang, R., Kaltani, L., & Loayza, N. (2005). Openness can be good for growth: The role of policy complementarities. NBER Working Papers, 117(87).
4. Dollar, D. (1992). OutwardÂoriented developing economies really do grow more rapidly: Evidence from 95 LDCs, 1976–1985. Economic Development and Cultural Change, 40(3), 523–44.
5. Dollar, D., & Kraay, A. (2004). Trade, growth and poverty. The Economic Journal, 114(493), 22–49.
6. Easterly, William. (2001)., The lost decades: Explaining developing countries’ stagnation in spite of policy reform, 1980–1998. Journal of Economic Growth, 6(2), 135–157.
7. Edwards, S. (1992). Trade orientation, distortions and growth in developing countries. Journal of Development Economics, 39, 31–57.
8. ———. (1993). Openness, trade liberalization, and growth in developing countries. Journal of Economic Literature, 31(3), 1358–93.
9. ———. (1998). Openness, productivity and growth: What do we really know? Economic Journal, 108, 383–98.
10. Esfahani, H.S. (1991). Exports, imports and economic growth in semiÂindustrialized countries. Journal Development Economics, 35(1), 93–116.
11. Faria, J., & Ledesma, L. (2003). Testing the Balassa–Samuelson effect: Implications for growth and the PPP. Journal of Macroeconomics, 25(2), 241–53.
12. Findlay, R. (1973). International trade and development theory. New York: Columbia University Press.
13. Fontagne, L., & Freudenberg, M. (2001). Long-term trends in intra-industry trade. New York: Palgrave Macmillan.
14. Granger, C.W.J. (1988). Some recent development in a concept of causality. Journal of Econometrics, 39(1–2), 199–211.
15. Ito, T., Isard, P., & Symansky, S. (1997). Economic growth and real exchange rate: An overview of the BalassaÂSamuelson hypothesis in Asia. NBER Working Paper No. 5979.
16. Krueger, A. (1978). Foreign trade regimes and economic development: Liberalization attempts and consequences. Ballinger: Cambridge, MA.
17. Krugman, P., & Helpman, E. (1988). Imperfect competition and international trade: Evidence from fourteen industrial countries. Cambridge: Harvard University Press.
18. Levine, R., & Renelt, D. (1992). A sensitivity analysis of crossÂcountry growth regressions. American Economics Review, 82(4), 942–63.
19. Lucas, R.E. (1988). On the mechanics of economic development. Journal Monetary Economics, 22(1), 3–42.
20. McKinnon, Ronald, I. (1964). Foreign exchange constraints and economic development. Economic Journal, 74, 488–409.
21. Musila, J., & Newark, J. (2003). Does currency devaluation improve the trade balance in the long run? Evidence from Malawi. African Development Review, 15(2), 339–52.
22. Plossner, C. (1992). The search for growth in policies for longÂrun economic growth. Federal Reserve Bank of Kansas City, Kansas City, MO.
23. Polterovich, V., & Popov, V. (2002). Accumulation of foreign exchange reserves and longÂterm economic growth. In S. Tabata & A. Iwashita (Eds), Slavic Eurasia’s integration into the world economy. Slavic Research Center, Hokkaido University, Sapporo.
24. Panagariya, A. 2003. Miracles and Debacles: Do Free-trade Skeptics have a Case? EconWPA “International Trade†series no. 0308013.
25. Panagariya, A. 2004. India in the 1980s: Weak Reforms, Fragile Growth. Department of Economics, University of Maryland.
26. Panagariya, A. 2005. The Triumph of India’s Market Reforms: The Record of the 1980s and 1990s. Policy Analysis.
27. Panagariya, A. 2004. Miracles and Debacles: In Defense of Trade Openness. EconWPA , International Trade 0403002.
28. Panagariya, A. 2004. India’s Trade Reform: Progress, Impact and Future Strategy. EconWPA, International Trade 0403004.
29. Rodriguez, F. & rodrik, D. 2001. Trade Policy and Economic Growth: A Skeptic's Guide to the Cross-National Evidence. NBER Chapters, in: NBER Macroeconomics Annual 2000, Volume 15, pages 261-338 National Bureau of Economic Research, Inc.
30. Reinsel, G.C., & Ahn, S.K. (1988). Asymptotic properties of the likelihood ratio test for cointrgration in the nonstationary vector AR model. Technical Report, Department of Statistics, University of Wisconsin, Madison.
31. Riezman, R.G., Whiteman, C.H., & Summers, P.M. (1996). The engine of growth or its handmaiden? A time series assessment of exportÂled growth. Empirical Economics, 21(1), 77–110.
32. Rodrik, Dani. (2008). The real exchange rate and economic growth. Brookings Papers on Economic Activity, 2, 365–412.
33. Romer, P.M. (1986). Increasing returns and longÂrun growth. Journal of Political Economy, 94(5), 1002–37.
34. ———. (1990). Endogenous technological change. Journal of Political Economy, 98(5), S71–S102.
35. Sachs, J.D., & Warner, A.M. (1995). Economic reform and the process of economic integration. Brookings Papers of Economic Activity, 1–118.
36. Shirazi, N.S., & Manap, T.A.A. (2004). ExportÂled growth hypothesis: Further econometric evidence from Pakistan. Pakistan Development Review, 43(4), 563–579.
37. Solow, R.M. (1956). A contribution to the theory of economic growth. Quarterly Journal of Economics, 70(1): 65–94.
38. Thangavelu, S., & Rajaguru, G. (2004). Is there an export or importÂled productivity growth in rapidly developing Asian countries? A multivariate VAR analysis. Applied Economics, 36(10), 1083–93.
39. Toda, H.Y., & Yamamoto, T. (1995). Statistical inference in vector autoregressions with possibly integrated processes. Journal of Econometrics, 66, 225–250.
40. Upadhyaya, K.P., & Dhakal, D. (1997). Devaluation and the trade balance: Estimating the longÂrun effect. Applied Economics Letters, 4(6), 343–45.
41. Wacziarg, R., & Welch, K.H. (2001). Trade liberalization and growth: New evidence. NBER Working Paper, 101(52).
42. Yanikkaya, H. (2003). Trade openness and economic growth: A crossÂcountry empirical investigation. Journal of Development Economics, 72, 57–89.
43. Namrata Anand (2014), “An Overview of Indian Economy (1991-2013)â€, IOSR Journal of Economics and Finance (IOSR-JEF), e-ISSN: 2321-5933, p-ISSN: 2321-5925.Volume 3, Issue 3. (Mar-Apr. 2014), PP 19-24, www.iosrjournals.org
44. Yanikkaya, H. 2003. Trade Openness and Economic Growth: A Cross-Country Empirical Investigation. Journal of Development Economics, 72, 57-89.
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Published
24.09.2016
How to Cite
Jaman, M. S. (2016) “Economic Growth, Domestic Investment, Real Exchange Rate and Trade Openness in India: A multi-cointegration analysis”, Journal of Global Economy, 12(3), pp. 169–184. doi: 10.1956/jge.v12i3.433.
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