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Testing Melitz Model to Examine Purchasing Power Parity (PPP) in India: 1968–2019

This article evaluates Purchasing Power Parity (PPP) with the aid of the Vector Error Correction Model (VECM) which reckons that an association stands among Real Exchange Rate, Interest Rate, and Inflation Rate in India. This article also determines a crucial heterogeneous firm’s trade model which is intentionally considerable the same as the Melitz hypothesis. The optimistic and restraining aspects of the model are evaluated in a pattern intended to feature the niche financial motive of the model. The assessment intends to review how extensively the picked macroeconomic methods provoke the India’s Real Exchange Rate, by operating the Johansen long-run experimenting strategy to trade with administration co-integration. The paper demonstrates intriguing determinations. Augmented Dickey-Fuller (ADF) unit root test, Phillips-Perron (PP) unit root tests, and Kwiatkowski–Phillips–Schmidt–Shin (KPS) tests have been encompassed to determine whether comprehensive data are stationary or not. By evaluating the Johansen test for cointegration, this article illustrates the union among Real Exchange Rate, Interest Rate, and Inflation Rate in India. VECM also applied to evaluate the short-run dynamics of Real Exchange Rate model. Cumulative Sum (CUSUM) and Cumulative Sum of Square (CUSUMQ) are utilized to assess the superiority of the model. The results illustrate short-run and long-run unions among Real Exchange Rate, Inflation Rate, and Interest Rate; and the findings shows that the Inflation Rate adversely exploits the Real Exchange Rate; notwithstanding, Interest Rate has an Optimistic effect. Furthermore, the Inflation rate has an accessible causal alliance with Real Exchange Rate; nevertheless, Interest rate has a unidirectional affair. This paper defines the chance to improve the Real Exchange Rate by lessening the Inflation rate and growing the Interest rate