Relationship between Real and Financial Variables in India: A Cointegration Analysis
14 Pages Posted: 2 May 2005
Date Written: April 12, 2005
Abstract
This paper investigates cointegrating relationship and the causality between the financial and the real sectors of the Indian economy using monthly observations from July 1992 through December 2002. The financial variables used are interest rates, inflation rate, exchange rate, stock return, and real sector is proxied by industrial productivity. Augmented Dickey Fuller and Phillips-Perron unit root tests are applied to check for stationarity in each series. Unit root tests show all variables are non-stationary in levels, but stationary in their first differences. Johansen multivariate cointegration test supports the long run equilibrium relationship between the financial sector and the real sector. The Granger test shows unidirectional Granger causality between the financial sector and real sector of the economy.
Keywords: Cointegration, Granger causality
JEL Classification: A10, G10
Suggested Citation: Suggested Citation