Capital-enhanced equilibrium exchange rate: evidence from India

ABSTRACT

This article examines the validity of the capital-enhanced equilibrium exchange rate (CHEER) approach using quarterly data ranging from 1993Q1 to 2016Q2. Using unit root break test and structural break cointegration technique,  our overall results indicated that the CHEER is invalidated once a structural break is accounted for in the cointegration relationship. The rejection of the validity could be attributed to the asymmetry in the capital flows and exchange rates being not fully flexible.

KEYWORDS:

• Purchasing power parity
• interest rate differentials
• exchange rate
• structural breaks
• cointegration

JEL CLASSIFICATION:

• C52
• C32
• F31
• F41

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ For a detailed review of different approaches on equilibrium exchange rates, see Égert, Halpern, and MacDonald (2006).

² The detailed procedure is explained in Johansen, Mosconi, and Nielsen (2000).