What Caused the 1991 Currency Crisis in India?

Did real overvaluation contribute to the 1991 currency crisis in India? This paper seeks an answer by constructing the equilibrium real exchange rate, using an error correction model and a technique developed by Gonzalo and Granger (1995). The results are affirmative and the evidence indicates that current account deficits and investor confidence also played significant roles in the sharp exchange rate depreciation. The ECM model is supported by superior out-of-sample forecast performance versus a random walk model.
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Volume/Issue: Volume 2000 Issue 157
Publication date: October 2000
ISBN: 9781451857481
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Business and Economics , Exports and Imports , WP , exchange rate , equilibrium exchange rate , India , Currency Crisis , Error Correction Model , Gonzalo-Granger decomposition , exchange rate depreciation , widening current account imbalance , Indian rupee , price level , exchange rate misalignment , terms of trade , Real exchange rates , Exchange rates , Current account deficits , Current account , Real effective exchange rates , Middle East

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Summary

Did real overvaluation contribute to the 1991 currency crisis in India? This paper seeks an answer by constructing the equilibrium real exchange rate, using an error correction model and a technique developed by Gonzalo and Granger (1995). The results are affirmative and the evidence indicates that current account deficits and investor confidence also played significant roles in the sharp exchange rate depreciation. The ECM model is supported by superior out-of-sample forecast performance versus a random walk model.

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