The Fundamental Equilibrium Real ExchangeRate in India : An Approach to Estimation and Measurement of Misalignment

An estimation of the real equilibrium exchange rate for India for the period in the latter half of the 1990s using fundamental economic variables by decomposing a structural VAR vested with appropriate restrictions consistent with open economy assumptions. The model identifies the permanent impact of three fundamental structural shocks, viz., real demand, supply and nominal shocks, and evaluates their relative contribution to the forecast error variance in the real exchange rate.