Reexamining the Nexus between Nominal and Real Effective Exchange Rates in India : An Application of Autoregressive Distributed Lag Model

The study is an attempt to reexamine the relationship between nominal effective exchange rates and real effective exchange rates in India. The study investigates both long-run and short-run relationships between the two variables by using Autoregressive Distributed Lag (ARDL) bounds tests approach. The monthly data of the variables for the period January 1994 to August 2016 was considered for the study. The results of the ARDL tests reveal that there exists a long-run relationship between the real effective exchange rate and nominal effective exchange rate. The results of the error correction mechanism highlight that there exist short-run deviations in their relationship. Any deviation from the long-term nominal depreciation is corrected by 7.3% over each month for real depreciation at 5% level of significance