Understanding the Asymmetric Effects of Exchange Rate on Economic Growth: Evidence from India

Zakir Hossen Shaikh; Shah Husain; Mohammad Noor Alam; Imran Ali Baig; Minakshi Rana

Authors

Zakir Hossen Shaikh Department of Finance and Accounting, College of Business Administration, Kingdom University, Bahrain
Shah Husain Department of Economics, Gitam School of Humanities and Social Sciences, Hyderabad, India
Mohammad Noor Alam University of Bahrain
Imran Ali Baig Department of economics, Jamia Millia Islamia Central University, New Delhi, India
Minakshi Rana Department of Humanities & Social Sciences, National Institute of Technology, Uttarakhand (India).

Keywords:

Exchange rate fluctuations, Economic growth, Asymmetric impact, Nonlinear auto-regressive distributed lag (NARDL), Granger causality test

Abstract

This study examines the short-term and long-term relationships between economic growth, exchange rate fluctuations, money supply, and government expenditure in India from 1980 to 2022. The study employs a nonlinear autoregressive distributed lag (NARDL) model to investigate the asymmetric relationships between these variables. In addition, the Granger causality test is used to determine the direction of causal relationships. The results of the NARDL model confirm a long-term relationship among economic growth, exchange rate changes, money supply, and government expenditure. The findings indicate that undervaluation negatively affects economic growth in India, whereas overvaluation promotes it. Furthermore, the analysis reveals an asymmetric impact of exchange rate changes on economic growth. The Wald test further supports the presence of asymmetry in both the short-run and long-run. The causality test results show bidirectional causality between exchange rates, government expenditure, and economic growth, while unidirectional causality runs from money supply to economic growth.

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