The export-led growth hypothesis for India: examining causality by a new approach in the time–frequency domain

Abstract

The literature on the relationship between export and growth is inconsistent in its conclusions regarding the direction of causality. Most recent contributions argue that inconclusive results among studies are likely to be related to the instability of causal relationships over time or over frequencies. To unify these two aspects in one approach, we compute a time-varying Diebold-Yilmaz (2012) spillover measure for the relationship between output and growth at different frequency scales which are obtained from discrete wavelet transforms. Our results confirm the time and scale dependence of causalities between export and output growth in India in the period 1960 to 2011. This new methodological approach can also be applied to systems of more than two variables and thus shows an avenue to modelling the time and scale dependence of causalities between many other economic variables.

Keywords:

• causality
• discrete wavelet transform
• export-led growth
• variance spillover
• time–frequency domain

JEL Classification:

• C32
• F43
• O24

Notes

¹ We use the industrial production index as proxy of output since there is no monthly GDP series for the Indian economy.