The IUP Journal of Applied Economics
The Impact of Monetary Policy on Foreign Trade and Investment: A Bayesian VAR Approach
Article Details
| Pub. Date | : January, 2021 |
|---|---|
| Product Name | : The IUP Journal of Applied Economics |
| Product Type | : Article |
| Product Code | : IJAE10421 |
| Author Name | : Vijaykumar Dhannur and Ashwin R John |
| Availability | : YES |
| Subject/Domain | : Economics |
| Download Format | : PDF Format |
| No. of Pages | : 14 |
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Abstract
This paper investigates the impact of monetary policy stance on trade and foreign investment in the pharmaceutical sector in India. It employs the Bayesian Vector Autoregression (BVAR) approach to construct a model and then studies the said impact by the Impulse Response Function (IRF) analysis. In a Bayesian procedure, the parameters are treated as random variables and their posterior distribution is estimated via the imposition of prior beliefs on their distribution, which makes the analysis more robust when combined with Vector Autoregression (VAR). It has been found that both FDI inflows and exports are impacted by inflation and interest rate changes; however, inflationary pressure has a pronounced impact. On the other hand, GDP growth does not seem to substantially impact both FDI inflows and exports as deduced from the Bayesian VAR with Stochastic Volatility and Time Varying Parameters (BVARSV-TVP) model. These findings have been deduced alongside a benchmark VAR model.
Description
Monetary policy stance has, in many empirical studies, shown to have an impact on investments
in an industry. The volume of investments also seems to have a considerable impact on the
level of exports. In macroeconomics, all the variables have an impact on the other-all are
interlinked. A stern monetary policy stance tends to adversely affect investments and
subsequently the exports. On the other hand, a growth-oriented monetary policy regime
would accelerate investments which, given the multiplier effect, would lead to rapid expansion
and thereby increasing export volumes.
This paper studies the impact of monetary policy shocks on the exports and foreign
investment inflows from the perspective of the Indian pharmaceutical sector. The call money
interest rate (INT) would be acting as a proxy for the monetary policy. In addition to these
variables, GDP growth rate (GDP) and inflation rate (CPI) have been included to study their
impact on the exports (EXP) and foreign direct investment inflows (FDI). Inclusion of
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