Budget 2001-2002 suggests a shift towards monetary policy in reviving an economic downturn, as in... more Budget 2001-2002 suggests a shift towards monetary policy in reviving an economic downturn, as in advanced economies like the US and Germany. In principle, there is nothing wrong in the use of monetary policy rather than fiscal policy, as the former has shorter lags. The question however is whether the link between investment and interest rates is as tight in India. The second point is the fast disappearing role of public investment as a tool to spur private investment.
With the emergence of a "two-speed" world in the aftermath of the 2008 crisis, financia... more With the emergence of a "two-speed" world in the aftermath of the 2008 crisis, financial flows are expected to flood emerging markets' shores, including those of India which has positive growth and interestrate differentials vis-a-vis the advanced countries. This article discusses existing policy options for India and concludes by emphasising the need to evolve a medium-term response strategy, one of whose elements include countercyclical fiscal responses.
... based on the government's scheme of development administration, so as to cover each ... more ... based on the government's scheme of development administration, so as to cover each of thecommunity develop-ment ... liberalisation measures were un-dertaken that allowed BRI to transform itself into a profitable rural financial in ... computerisation introduced timely reporting. ...
... otherwise; we are also ignoring here the emergence of the Indian capital market in ... has be... more ... otherwise; we are also ignoring here the emergence of the Indian capital market in ... has been identified as having an adverse impact is the profitability and portfolio ... Empirical evidence establishing causality between priority sector loans and banks' incomes through subsidised ...
India’s capital account liberalization began 20 years ago, but a lot of controls still remain. Th... more India’s capital account liberalization began 20 years ago, but a lot of controls still remain. The central bank’s strategy has been to open financial markets cautiously while ensuring risk management systems and competencies are in place to ensure the system’s resilience to foreign shocks. Has the regulation insulated Indian markets from global shocks? This paper estimates uncovered interest parity relationships and finds that capital controls continue to provide a certain degree of autonomy to the central bank when setting policy rates. Vector Autoregressive (VAR) models are constructed to derive impulse response functions illustrating the transmission of a shock to foreign capital inflows through the different segments of India’s financial sector. To provide a sense of the complexity of the regulation on capital account transactions, the paper provides a primer on the controls in place, which it uses to identify coefficient restrictions in the Structural VAR model.
Managing capital flows is the key policy challenge for emerging economies like India in the after... more Managing capital flows is the key policy challenge for emerging economies like India in the aftermath of the crisis. In contrast to other emerging markets who are levying capital controls, India‘s macro-monetary framework is distinguished by significant restrictions that help manage inflows. Against this context, the paper characterizes India‘s capital account management strategy through illustrating the 2006-07 episodes of capital
We examine the evolution of prices in the nontradable and tradable sectors of the Indian economy ... more We examine the evolution of prices in the nontradable and tradable sectors of the Indian economy over 1980-2006 and find widening inflation differentials between the two sectors: the real exchange rate has been appreciating. This might seem unsurprising, since India’s per capita income has been growing rapidly, suggesting the trend is in line with the predictions of the Balassa-Samuelson hypothesis. However, this theory cannot be the sole explanation, since after 1990, the tradable-nontradable labor productivity gap, the driver of a real appreciation according to Balassa-Samuelson, has virtually disappeared. In that case, what explains the real appreciation? We assess the role of both demand and supply factors. Our results indicate that higher real per capita income growth in the 1990s accounts for much of the faster growth of nontradable prices during the post-reform period. Falling import prices were also an important contribution to the relative price increase, along with an expa...
The paper analyses some vital aspects of India’s flexible inflation targeting (FIT) regime, whose... more The paper analyses some vital aspects of India’s flexible inflation targeting (FIT) regime, whose first-term performance was evaluated by the RBI in 2021. The absence of negative shocks, collapse of international commodity prices at the time of its introduction, and decelerating growth are pointed out in this article as notable contributors to achieving inflation target than the change of regime as claimed by the RBI. The success in anchoring inflation expectations is contestable in the light of their rigid persistence, association with fuel prices and upward drift with resurgence of inflation in recent times, indicating that the task remains unaccomplished. The post-FIT rise in output volatility is highlighted, raising the question if increased inflation focus contributed to slower growth. Macroeconomic stability ascribed to credibility gained under FIT is similarly shown without basis as indicated by oil-price spikes and exchange rate pressures. Overall, FIT’s performance awaits f...
This paper examines India's demonetization from the standpoint of policy credibility, employi... more This paper examines India's demonetization from the standpoint of policy credibility, employing the standard norms for assessing macroeconomic policies. The credibility appraisal constructs a narrative from contemporaneous economic records, computes the f iscal and quasi-f iscal bailout costs for mitigation, monetary costs of implementation, as well as effects upon the financial sector using public data and other empirical evidence. It considers counterfactual policy tools to examine if demonetization objectives could have been more effectively achieved at lesser costs. Based upon these comprehensive measures, the paper concludes that demonetization does not meet the established principles of credibility in the macroeconomic literature.
This paper tests for mean-reversion in real exchange rates for India during the recent (managed) ... more This paper tests for mean-reversion in real exchange rates for India during the recent (managed) float period yield evidence of mean- reversion in the real exchange rate series constructed with the consumer price index as deflator as well as for a series constructed using the ratio of wholesale and consumer price indices to proxy for the shares of tradable and non-tradable goods. An interesting finding is that there is no evidence for mean-reversion when the real exchange rate is computed with a broader base of currencies, suggesting exchange rate policy stabilisation effects vis-a-vis the US dollar. Another finding is that PPP fails to hold for the detrended relative prices of traded to non- traded goods, indicating possible presence of Balassa-Samuelson effect. The findings indicate the need for a model specifying real deterinants of the exchange rate to separate nominal disturbances from the real effects.
Budget 2001-2002 suggests a shift towards monetary policy in reviving an economic downturn, as in... more Budget 2001-2002 suggests a shift towards monetary policy in reviving an economic downturn, as in advanced economies like the US and Germany. In principle, there is nothing wrong in the use of monetary policy rather than fiscal policy, as the former has shorter lags. The question however is whether the link between investment and interest rates is as tight in India. The second point is the fast disappearing role of public investment as a tool to spur private investment.
With the emergence of a "two-speed" world in the aftermath of the 2008 crisis, financia... more With the emergence of a "two-speed" world in the aftermath of the 2008 crisis, financial flows are expected to flood emerging markets' shores, including those of India which has positive growth and interestrate differentials vis-a-vis the advanced countries. This article discusses existing policy options for India and concludes by emphasising the need to evolve a medium-term response strategy, one of whose elements include countercyclical fiscal responses.
... based on the government's scheme of development administration, so as to cover each ... more ... based on the government's scheme of development administration, so as to cover each of thecommunity develop-ment ... liberalisation measures were un-dertaken that allowed BRI to transform itself into a profitable rural financial in ... computerisation introduced timely reporting. ...
... otherwise; we are also ignoring here the emergence of the Indian capital market in ... has be... more ... otherwise; we are also ignoring here the emergence of the Indian capital market in ... has been identified as having an adverse impact is the profitability and portfolio ... Empirical evidence establishing causality between priority sector loans and banks' incomes through subsidised ...
India’s capital account liberalization began 20 years ago, but a lot of controls still remain. Th... more India’s capital account liberalization began 20 years ago, but a lot of controls still remain. The central bank’s strategy has been to open financial markets cautiously while ensuring risk management systems and competencies are in place to ensure the system’s resilience to foreign shocks. Has the regulation insulated Indian markets from global shocks? This paper estimates uncovered interest parity relationships and finds that capital controls continue to provide a certain degree of autonomy to the central bank when setting policy rates. Vector Autoregressive (VAR) models are constructed to derive impulse response functions illustrating the transmission of a shock to foreign capital inflows through the different segments of India’s financial sector. To provide a sense of the complexity of the regulation on capital account transactions, the paper provides a primer on the controls in place, which it uses to identify coefficient restrictions in the Structural VAR model.
Managing capital flows is the key policy challenge for emerging economies like India in the after... more Managing capital flows is the key policy challenge for emerging economies like India in the aftermath of the crisis. In contrast to other emerging markets who are levying capital controls, India‘s macro-monetary framework is distinguished by significant restrictions that help manage inflows. Against this context, the paper characterizes India‘s capital account management strategy through illustrating the 2006-07 episodes of capital
We examine the evolution of prices in the nontradable and tradable sectors of the Indian economy ... more We examine the evolution of prices in the nontradable and tradable sectors of the Indian economy over 1980-2006 and find widening inflation differentials between the two sectors: the real exchange rate has been appreciating. This might seem unsurprising, since India’s per capita income has been growing rapidly, suggesting the trend is in line with the predictions of the Balassa-Samuelson hypothesis. However, this theory cannot be the sole explanation, since after 1990, the tradable-nontradable labor productivity gap, the driver of a real appreciation according to Balassa-Samuelson, has virtually disappeared. In that case, what explains the real appreciation? We assess the role of both demand and supply factors. Our results indicate that higher real per capita income growth in the 1990s accounts for much of the faster growth of nontradable prices during the post-reform period. Falling import prices were also an important contribution to the relative price increase, along with an expa...
The paper analyses some vital aspects of India’s flexible inflation targeting (FIT) regime, whose... more The paper analyses some vital aspects of India’s flexible inflation targeting (FIT) regime, whose first-term performance was evaluated by the RBI in 2021. The absence of negative shocks, collapse of international commodity prices at the time of its introduction, and decelerating growth are pointed out in this article as notable contributors to achieving inflation target than the change of regime as claimed by the RBI. The success in anchoring inflation expectations is contestable in the light of their rigid persistence, association with fuel prices and upward drift with resurgence of inflation in recent times, indicating that the task remains unaccomplished. The post-FIT rise in output volatility is highlighted, raising the question if increased inflation focus contributed to slower growth. Macroeconomic stability ascribed to credibility gained under FIT is similarly shown without basis as indicated by oil-price spikes and exchange rate pressures. Overall, FIT’s performance awaits f...
This paper examines India's demonetization from the standpoint of policy credibility, employi... more This paper examines India's demonetization from the standpoint of policy credibility, employing the standard norms for assessing macroeconomic policies. The credibility appraisal constructs a narrative from contemporaneous economic records, computes the f iscal and quasi-f iscal bailout costs for mitigation, monetary costs of implementation, as well as effects upon the financial sector using public data and other empirical evidence. It considers counterfactual policy tools to examine if demonetization objectives could have been more effectively achieved at lesser costs. Based upon these comprehensive measures, the paper concludes that demonetization does not meet the established principles of credibility in the macroeconomic literature.
This paper tests for mean-reversion in real exchange rates for India during the recent (managed) ... more This paper tests for mean-reversion in real exchange rates for India during the recent (managed) float period yield evidence of mean- reversion in the real exchange rate series constructed with the consumer price index as deflator as well as for a series constructed using the ratio of wholesale and consumer price indices to proxy for the shares of tradable and non-tradable goods. An interesting finding is that there is no evidence for mean-reversion when the real exchange rate is computed with a broader base of currencies, suggesting exchange rate policy stabilisation effects vis-a-vis the US dollar. Another finding is that PPP fails to hold for the detrended relative prices of traded to non- traded goods, indicating possible presence of Balassa-Samuelson effect. The findings indicate the need for a model specifying real deterinants of the exchange rate to separate nominal disturbances from the real effects.
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