The spillover effects of global macroeconomic variables on trade flows: a wavelet-based study for India

Purpose This paper aims to study the transmission of shocks from global macroeconomic variables to international trade volumes of an emerging market economy. Design/methodology/approach This paper estimates the return and volatility spillovers from global factors such as crude price, global economic activity and global policy uncertainty to India’s imports and exports. This paper also includes the effects of real exchange rate, credit availability, domestic output gap and domestic policy uncertainty. The paper uses wavelet time-scale decomposition analysis to extract the spillovers received by imports and exports at various frequencies, which are otherwise invisible in the raw data. The conditional volatility of variables is extracted using the ARMA-GARCH model. Findings The results show that India’s imports and exports receive return spillovers from real exchange rate, credit availability, crude price and global economic policy uncertainty at lower frequencies. India’s exports receive volatility spillovers from global economic activity at higher frequencies. Research limitations/implications Because different factors impact trade cycles in the short term and long term, understanding the spillovers at different frequencies is essential for policymakers, businesses and investors to prepare for potential economic fluctuations. Practical implications This paper observes spillovers from REER to trade at lower frequency cycles, which calls for better foreign exchange hedging options in the medium to long term. Social implications Enhancing economic partnerships, reducing trade barriers and attracting foreign capital to foster local production could help manage trade spillovers. Originality/value While existing studies used the wavelet method to estimate spillovers in economic and financial variables, to the best of the authors’ knowledge, there is no study using this method to examine spillover from global and domestic macroeconomic variables to international trade. This paper fills this gap.