Some dynamic macroeconomic perspectives for India’s economic growth: Applications of linear ARDL bounds testing for co-integration and VECM

Abstract

Purpose

The purpose of this paper is to study impacts of changes in crude oil price, money supply, fiscal deficit and effective exchange rate on India’s economic growth (expressing all variables in real term).

Design/methodology/approach

First, a simple macroeconomic model is formulated to this effect. Next, linear autoregressive distributed lag procedure and vector error-correction model are applied for growth empirics. Annual data are used from 1977 through 2015.

Findings

Rises in real crude oil price and monetized real fiscal deficits have negative short-run and long-run effects on real economic growth. Increase in real money supply and real effective exchange rate appreciation helps promote real economic growth in both short run and long run. In all cases, there is evidence of net interactive positive feedback effects among the variables in the short run. Real effective exchange rate appreciation dampens exports, but it is helpful to imports of capital goods and crude oil that contribute to economic growth. So, the net effect on the economy may be conjecturally positive.

Originality/value

To the best of the authors’ knowledge, this paper is unique because of the formulation of macro-economic model pertaining to the topic and its subsequent empirical verification. Moreover, this paper seems more comprehensive than some other studies, cited in the literature review.

Citation

Rahman, M. and Islam, A. (2020), "Some dynamic macroeconomic perspectives for India’s economic growth: Applications of linear ARDL bounds testing for co-integration and VECM", Journal of Financial Economic Policy, Vol. 12 No. 4, pp. 641-658. https://doi.org/10.1108/JFEP-11-2018-0165