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What Caused the 1991 Currency Crisis in India?

Author

Listed:
  • Ms. Sweta Chaman Saxena
  • Ms. Valerie Cerra
Abstract
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.

Suggested Citation

  • Ms. Sweta Chaman Saxena & Ms. Valerie Cerra, 2000. "What Caused the 1991 Currency Crisis in India?," IMF Working Papers 2000/157, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2000/157
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    Keywords

    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;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications

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