The Error Correction Model in Elucidating the Association of Exchange Rate and FDI Inflows in India

Abstract

The current study determined long term association between exchange rate and FDI inflows in India ranging from 1991 to 2015. Exchange rate was taken as an exogenous variable while FDI was considered as an endogenous variable. To examine whether there was a long term association between the two considered variables or not, Engel-Granger Approach of co-integration was used and further, cointegration vector was built. The variables were found to be integrated of order one I(1). The empirical results of co-integration revealed that there existed a co-integration between FDI Inflows and exchange rate which was further followed by error correction mechanism.