Real Exhange Rate Stationarity in Managed Floats: Evidence From India

This paper tests for mean-reversion in real exchange rates for India during the recent (managed) float period yield evidence of mean- reversion in the real exchange rate series constructed with the consumer price index as deflator as well as for a series constructed using the ratio of wholesale and consumer price indices to proxy for the shares of tradable and non-tradable goods. An interesting finding is that there is no evidence for mean-reversion when the real exchange rate is computed with a broader base of currencies, suggesting exchange rate policy stabilisation effects vis-a-vis the US dollar. Another finding is that PPP fails to hold for the detrended relative prices of traded to non- traded goods, indicating possible presence of Balassa-Samuelson effect. The findings indicate the need for a model specifying real deterinants of the exchange rate to separate nominal disturbances from the real effects.