Vikas Charmal and Ashima Goyal
A change in monetary operating procedures provides a natural experiment which is used to evaluate, first, whether Indian monetary policy transmission is better when durable…
Abstract
Purpose
A change in monetary operating procedures provides a natural experiment which is used to evaluate, first, whether Indian monetary policy transmission is better when durable liquidity is in surplus or when it is in deficit; second whether it is better with interest rates as the policy instrument or quantity of money or a mixture of the two.
Design/methodology/approach
This study first shows that the period of analysis can be divided into two separate regimes one of liquidity surplus (2002–2010) and the other of deficit (2011–2019).This study then estimates separate structural vector auto-regressions (SVARs) for the financial and real sector, with relevant exogenous foreign, policy and other variables for each of the periods as well as SVARs for the whole period with alternative operating instruments.
Findings
Monetary transmission from the repo rate was better during the period the liquidity adjustment facility (LAF) was in surplus with the central bank in absorption mode denoting excess durable liquidity. Pass through was faster and the repo rate had a greater influence on other variables. The impact of the rate on output gap exceeds that on inflation. The weighted average call money rate was found to outperform others as the operating target. Monetary policy has evolved so that policy rates are more effective in transmission compared to money supply, but best results are when durable liquidity is also in surplus.
Originality/value
The results contribute to ongoing debates on the Indian monetary policy framework and give useful inputs for policy in emerging markets where research is scarce. They suggest keeping the LAF in deficit mode over 2011–19 was not optimal.
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Ashima Goyal and Abhishek Kumar
The purpose of this paper is to estimate the relationship between the current account (CA) and fiscal deficit (FD), and the real exchange rate for India, for the managed float…
Abstract
Purpose
The purpose of this paper is to estimate the relationship between the current account (CA) and fiscal deficit (FD), and the real exchange rate for India, for the managed float period 1996 Q2 to 2015 Q4, after controlling for output growth and oil shocks. It also examines the cyclicality of the CA, the size of each shock, and assesses whether aggregate demand, forward-looking smoothing, or supply shocks dominate outcomes.
Design/methodology/approach
The authors use several variants of structural vector autoregression (SVAR), implemented with quarterly Indian data, to control for effects of oil prices, and the output cycle, and then see how FD shocks affect the current account deficit (CAD) and the real exchange rate. For robustness, the authors tried different identifications, changed variable definitions, added new variables, or substituted with other variables. The cyclicality issue is addressed by examining the effect of growth shocks. The relative size of each shock is assessed through co-movement decompositions of the forecast errors. Responses to shocks help identify dominant influences on India’s CAD.
Findings
The CAD is found to be countercyclical. A FD shock raises the CAD, but high impact growth shocks and large variance oil shocks lead to overall divergence of the deficits. There is some support for the aggregate demand channel, but it is moderated by supply shocks and compositional effects. Consumption is sticky rather than forward-looking.
Originality/value
The paper contributes to the literature by including supply shocks, compositional effects, cyclicality, real interest and exchange rate in a theoretically and empirically consistent way for the analysis of twin deficits. The large empirical literature on twin deficits in EMs has not yet done this. There is no study using quarterly data in an SVAR allowing the dynamic relationship between the variables to be explored. The extensions bring in the supply side and compositional effects qualify the working of both the channels, with empirical exercises supporting theoretical predictions.
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Krittika Banerjee and Ashima Goyal
After the adoption of unconventional monetary policies (UMPs) in advanced economies (AEs) there were many studies of monetary spillovers to asset prices in emerging market…
Abstract
Purpose
After the adoption of unconventional monetary policies (UMPs) in advanced economies (AEs) there were many studies of monetary spillovers to asset prices in emerging market economies (EMEs) but the extent of contribution of EMEs and AEs, respectively, in real exchange rate (RER) misalignments has not been addressed. This paper addresses the gap in a cross-country panel set-up with country specific controls.
Design/methodology/approach
Fixed effects, pooled mean group (Pesaran et al., 1999) and common correlated effects (Pesaran, 2006) estimations are used to examine the relationship. Multiway clustering is taken into account to ensure robust statistical inferences.
Findings
Robust evidence is found for significant monetary spillovers over 1998–2017 in the form of RER overvaluation of EMEs against AEs, especially through the portfolio rebalancing channel. EME RER against the US saw significantly more overvaluation in UMP years indicating greater role of the US in monetary spillovers. However, in the long-run monetary neutrality holds. EMEs did pursue mercantilist and precautionary policies that undervalued their RERs. Precautionary undervaluation is more evident with bilateral EME US RER.
Research limitations/implications
It may be useful for large EMEs to monitor the impact of foreign portfolio flows on short-run deviations in RER. Export diversification reduces EME mercantilist motives against the US. That AE monetary policy significantly appreciates EME RER has implications for future policy cooperation between EMEs and AEs.
Originality/value
To the best of the author's knowledge such a comparative analysis between AE and EME policy variables on RER misalignment has not been done previously.
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Ashima Goyal and Prashant Parab
The authors model heterogeneity of inflation expectations across Indian households using the Inflation Expectations Survey of Households data set. Using Carroll-type…
Abstract
The authors model heterogeneity of inflation expectations across Indian households using the Inflation Expectations Survey of Households data set. Using Carroll-type epidemiological models and pooled cross sectional analyses, the authors find that women, homemakers, older people and Tier 2 and 3 city dwellers tend to have higher inflation expectations compared to their counterparts. In the epidemiological model-based analysis, these very cohorts display higher speed of adjustment to news. Overall higher relative adjustment speeds point to the significance of central bank communications.
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If banks solve an inter-temporal problem under adverse selection and moral hazard, then bank specific factors, regulatory and supervisory features, market structure, and…
Abstract
If banks solve an inter-temporal problem under adverse selection and moral hazard, then bank specific factors, regulatory and supervisory features, market structure, and macroeconomic factors can be expected to affect banks’ loan interest rates and their spread over deposit interest rates. To examine interest rate pass-through for Indian banks in a period following extensive financial reform, after controlling for all these factors, we estimate the determinants of commercial banks’ loan pricing decisions, using the dynamic panel data methodology with annual data for a sample of 33 banks over the period 1996–2012. Results show commercial banks consider several factors apart from the policy rate. This limits policy pass-through. More competition reduces policy pass-through by decreasing the loan rate as well as spreads. If managerial efficiency is high then an increase in competition increases the policy pass-through and the vice-versa. Reform has had mixed effects, while managerial inefficiency raised rates and spreads, product diversification reduced both. Costs of deposits are passed on to loan rates. Regulatory requirements raise loan rates and spreads.
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The global economic fallout following the unexpected onset and rapid spread of COVID-19 pandemic worldwide, in early 2020, has necessitated international and national action plans…
Abstract
The global economic fallout following the unexpected onset and rapid spread of COVID-19 pandemic worldwide, in early 2020, has necessitated international and national action plans towards new normal models of realignment in enterprise bottom-line and management. In 2020, ‘Supporting Small Business through the COVID-19 Crisis’ was declared the lead theme of the MSME Day – June 27 – by the UN. A ‘COVID Response Alliance for Social Entrepreneurs’ was launched by an affiliate of the World Economic Forum (WEF). Drawing inspiration from the ‘small business’ focus of the UN MSME Day declaration and the ‘social entrepreneurship’ perspective of the WEF, the study seeks to draw few perceptions and conclusions in the post-COVID economic recovery context of India, where Micro, Small and Medium Enterprises (MSMEs) are observed to be a key driver of development, thanks to an add-on supportive package in the wake of the COVID-19 economic crisis. It is found that the package fails to provide a direct push for promotion of social enterprises/entrepreneurship in the Indian MSME sector, as there is no focused policy approach on leveraging ‘entrepreneurship resources’. Hence, the general trend of the sector continues to be dominated by the ‘for-profit first’ concern rather than a fair blend of ‘social value creation first’, with ‘profit’. Discourse on social entrepreneurship and action-oriented rehabilitation tools proposed in the Covid context globally have failed to reorient the dominant outlook of social enterprises in India – business as a tool for achieving social impact – to social impact as a spontaneous/positive outcome from business. The study highlights the lapses on the ground, of theoretical formulations, despite their couching in Covid contexts, and the need for a more institutionalised enabling environment for social value creation, impact investment and social stock exchange in the social enterprise ecosystem.
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Sufficiently persistent rise in nominal interest increases inflation rate in short-run. This short-run comovement of nominal interest rate and inflation rate is known as…
Abstract
Sufficiently persistent rise in nominal interest increases inflation rate in short-run. This short-run comovement of nominal interest rate and inflation rate is known as Neo-Fisherianism. This chapter proposes a policy based on Neo-Fisherianism to escape Zero Lower Bound (ZLB) using a textbook Forward Looking New Keynesian Model. I have shown that proposed policy with properly chosen inflation target and persistence can stimulate economy and escape ZLB by raising nominal interest rate. I have also shown that the proposed policy is robust to varying degrees of price stickiness.
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Saurabh Ghosh, Siddhartha Nath and Sauhard Srivastava
This study aims to explore the long-run equilibrium relationship between India’s real exchange rate and sectoral productivity trends using internationally comparable KLEMS…
Abstract
Purpose
This study aims to explore the long-run equilibrium relationship between India’s real exchange rate and sectoral productivity trends using internationally comparable KLEMS databases on productivity for India, China, Euro area, the USA, the UK and Japan.
Design/methodology/approach
This study uses pooled mean group estimations for panel data suggested by Pesaran et al. (1999). This method is chosen because of the presence of variables with different orders of integration.
Findings
The results find support for an “extended” Balassa–Samuelson (BS) hypothesis which allows labour market frictions that does not allow for wage equalisation between traded and non-traded sectors within a country. This mechanism continues to find some support when we separate out distribution sector that comprises wholesale and retail trade in the domestic services sector. The empirical evidence suggests that India’s real exchange rate is anchored to domestic fundamentals and is closely aligned to its fair value over a medium to long-time horizon.
Originality/value
To the best of the authors’ knowledge, unlike the available literature, which uses aggregate per-capita income as proxy for a country’s productivity growth, this paper perhaps makes the first attempt to validate the BS hypothesis by accounting for productivity differential at the sectoral levels using KLEMS data across countries. Moreover, this study takes the country’s productivity improvement rather than using a basket of countries, a prevalent practice in the literature. While this paper uses India’s data, which witnessed a prolonged appreciation in its real effective exchange rate and rapid technological progress, the authors believe its findings and policy implications could be applicable to the similar emerging market economies.