Non-linear Effect of Real Exchange Rate Variability with Macroeconomic Variable on Non-Petroleum Commodities of India– US Trade

AuthorMohini Gupta,Sakshi Varshney
Published date01 May 2023
Date01 May 2023
Subject MatterArticles
Non-linear Effect of
Real Exchange Rate
Variability with
Macroeconomic Variable
on Non-Petroleum
Commodities of
India–US Trade
Mohini Gupta1 and Sakshi Varshney1
This article aims to explore the asymmetric influence of real exchange rate
volatility on India–US trade commodity-wise. In this study, the assumption of
symmetric relation is neglected and assessed on the asymmetric effect of real
exchange rate volatility on 90 commodities distributed under 6 industries. This
study verifies short-run and long-run asymmetry effects, the short-run effect in
21 Indian exporting commodities and 19 Indian importing commodities. However,
the short-run effect lasting onto the long run in 16 exporting commodities and
27 importing commodities strongly supports the J-curve. Also, non-linear causal-
ity is witnessed in this study running from real exchange rate variability to export
trade and import trade. The empirical analyses explain that commodities will
benefit the export or import growth with the depreciation of exchange rate or
discouraging with the appreciation of exchange rate. The findings of the study
provide a view for policy making.
JEL Codes: C22, F1, F14, F31, O19
Real exchange rate volatility, non-linear causality, asymmetry, trade, India
1Department of Humanities and Social Science, Jaypee Institute of Information Technology, Noida,
Uttar Pradesh, India.
Corresponding author:
Mohini Gupta, Department of Humanities and Social Science, Jaypee Institute of Information
Technology, Noida, Uttar Pradesh 201309, India.
Foreign Trade Review
58(2) 289–328, 2023
© 2022 Indian Institute of
Foreign Trade
Reprints and permissions:
DOI: 10.1177/00157325221077004
290 Foreign Trade Review 58(2)
The voguish year 1973 presents the international monetary system which opt the
oating exchange rate, under this system national currencies has started to uctu-
ate in the global market. The great exibility in the exchange rate was considered
to make countries concentrate on their domestic issues, which could be inimical
to trade. From that time, voluminous researchers and academicians overviewed
the inuence on trade concerning exchange rate risk. The theoretical develop-
ment by De Grauwe (1988) presents both positive and negative outcomes of the
variability of exchange rate on international trade ow. A large number of litera-
ture views point to the numerous empirical analyses at country level, pairwise
country and individual sector level with mixed results—a trader of risk-averse
nature will trade less, whereas a risk-taker will trade more. Also, mentioned in a
review outline of Bahmani-Oskooee and Hegerty (2007), the empirical analysis
related to the ‘J-curve’ signicance supports both the kind of traders. Considering
the economic theory, the depreciation in currency accelerates export and hinders
import; on the other hand, reection of appreciation in currency curtail export
and stimulate import. Subsequently, the markets’ relative prices behave according
to the domestic currency depreciation or appreciation, making the increment or
decrement in export and import volume. Apropos of this, uncertainty of exchange
rate is considered as a crucial factor for both export- and import-oriented indus-
tries in the international trade market.
Over the last decades, many studies have concentrated on the exchange rate as
it is an endogenous variable. Its interaction with macroeconomic, financial and
oversea trade is dynamic, whereas on the individual level, considering the fluctua-
tion or risk associated with it and traders’ market, it is an exogeneous variable.
The outline of Bahmani-Oskooee and Hegerty (2007) has reviewed ample litera-
ture, and it reveals that literature has been analysed on various groups. It has
overlooked the assessment of volatility from the exchange rate on the trade mar-
ket at an aggregate level. Many studies have taken countries with the world to
examine the exchange rate uncertainty at aggregate and disaggregate levels (for
instance, Arize et al., 2000; Barkoulas & Baum, 2002; Chit et al., 2010;
Hondroyiannis et al., 2008; Nicita, 2013; Tenreyro et al., 2004). These studies
estimate the demand model of import and export and examine the exchange rate
risk with other complimentary macroeconomic variables supporting the Marshall–
Lerner (M–L) condition. The exchange rate fluctuation seems to have an effect on
both export and import. As per the neoclassical international theory, the deprecia-
tion in the domestic currency accelerates the export whereas appreciation would
make the import more expensive, to stabilize the trade balance. Analogous litera-
ture finds mixed results; like Arize et al. (2000) considers 13 least developing
countries. The cointegration method unveils that exchange rate fluctuation
adversely impacts all countries and the other macroeconomic variables included
in it. But opposing it, Poon et al. (2005) explain that the exchange rate uncertainty
has a positive effect on export. Similarly, many pieces of literature have contra-
dicting results; for instance, Hondroyiannis et al. (2008), Chit et al. (2010), Boug
and Fagereng (2010) Dellas and Zilberfarb (2015), Panda and Mohanty (2018),
Lazarov (2019) and Çulha et al. (2019).
Gupta and Varshney 291
In the recent studies, voluminous literature has concentrated on the bilateral
trade on a more disaggregated level, assuming the symmetric relation linking the
industrial trade and exchange rate uncertainty. The documentary research support-
ing it are of Bahmani-Oskooee and Kanitpong (2019), Murad and Science (2014),
Vo et al. (2019), Chang et al. (2019) and Bahmani-Oskooee and Baek (2016). This
extended literature work accounts for different effect levels such as large or small
exchange rate uncertainty. The studies related to such an effect are considered as
the price of the trading commodities depends on the size. Additionally, the traders
do not counter to small exchange rate changes, but they do respond to large move-
ments. So, traders may respond accordingly to generate revenue and secure them-
selves from the loss in future (Arbabian et al., 2019).
As per the World Bank report, the USA is India’s largest trading country in
both aspects. To seek a more detailed trading evolution between both nations, we
plot the trade of India on our monthly study period, as shown in Figure 1. Today,
more than 16% of India’s export goes to the USA.
From the studies, it is extracted that feature of asymmetry assumption predicts
if the depreciation or appreciation occur due to exchange rate movement then it
improves the trade as well. Whereas many studies argue that price rigidity makes
traders expected behaviour corresponding with the exchange rate activity could
lead an asymmetric effect. To discover the non-linear relation, we try to collect the
evidence of J-curve, focusing on commodity trade of India to the USA by includ-
ing non-linear adjustment taken on bilateral real exchange rate. As per our under-
standing, this article offers to explore non-linear relation with J-curve evidence
and simultaneously non-linear causality for the first time.
Figure 1. India’s Export to and Import from the USA.
Source: The authors.

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