IS INDONESIA’S CURRENT ACCOUNT BALANCE OPTIMAL? EVIDENCE FROM AN INTERTEMPORAL APPROACH

This study investigates whether Indonesia’s Current Account (CA) balance is intertemporally solvent. We provide fresh evidence on Indonesia’s CA deficit solvency by considering post-crisis period data and conducting sub-sample analysis. Our findings suggest that Indonesia’s CA is not solvent. We notice evidence of excess lending prior to the global financial crisis of 2008 and excess borrowing in the postcrisis period. Policymakers need to focus on the composition of capital flows and management of volatile capital flows since discouraging foreign capital inflows may serve as a deterrent to economic growth

DOES INTERNATIONAL MONETARY POLICY INFLUENCE THE BANK RISK? EVIDENCE FROM INDIA

This study empirically examines the impact of international monetary policy on bank risk in the Indian context. Using annual data from 64 banks and employing panel OLS and GMM techniques, this study finds that: (1) a contractionary international monetary policy increases bank risk; (2) an appreciation of the domestic exchange rate induces bank riskiness; (3) the domestic monetary policy affects bank risk through the “search for yield” channel; and (4) the international monetary policy is relatively significant in explaining the bank riskiness in the post-global financial crisis period

COVID-19 UNCERTAINTY AND MONETARY POLICY RESPONSES: EVIDENCE FROM EMERGING MARKET ECONOMIES

This paper examines the effectiveness of monetary policy transmission in emerging economies during the COVID-19 outbreak. Using data from 14 emerging economies severely affected by the pandemic and the autoregressive distributed lag approach to cointegration, the study examines the effectiveness of monetary policy in affecting output, inflation, and credit. The study finds that: (1) In most economies, the monetary policy transmission to inflation is weakened due to the uncertainty created by the COVID-19 pandemic; (2) in a few economies, the transmission is found to be effective in stabilizing credit and output; and (3) the outbreak of the COVID-19 pandemic induced economic agents to follow a “cautionary” or “wait and see” approach

Testing the intertemporal sustainability of current account in the presence of endogenous structural breaks: Evidence from the top deficit countries

We examine the sustainability of the current account (CA) deficits among the top deficit countries occurring consistently in the period after the global financial crisis period. Hence, we chose four developed economies, namely, Australia, Canada, the UK, and the US, and three emerging market economies, namely, Brazil, India, and Turkey. The results indicate that information about structural breaks, occurring around the GFC period, improves the cointegration results significantly. We find that five out of the seven countries, except Australia and the UK, exhibit sustainable CA deficits. Further, results with disaggregated CA indicates that the services account is sustainable in all countries while goods account is unsustainable in Australia, the UK, and India. Overall, our findings reveal the possibility of aggregation bias in affecting the CA sustainability results. Thus, CA deficits are not necessarily bad for an economy if it can generate sufficiently large future net export surpluses to pay its current net foreign outstanding debt

Testing deviations from PPP and UIP: evidence from BRICS economies

This paper aims to investigate the interrelations between purchasing power parity (PPP) and uncovered interest parity (UIP) in BRICS economies, namely, Brazil, Russia, India, China and South Africa, by checking the validity of the capital-enhanced equilibrium exchange rate (CHEER) approach. Further, this study tests whether the CHEER results are data frequency-dependent. Design/methodology/approach: The present study uses monthly data ranging from 1997M01 to 2016M12 and considers the US economy as the representative foreign country. The study uses structural break unit root test and structural break cointegration technique to test the presence of economic relationships between nominal exchange rates and each of the price and interest rate differentials. Then, the study examines the validity of the CHEER approach by testing the appropriate theoretical restrictions. Findings: The cointegration results suggest the existence of two cointegrating vectors representing UIP and PPP conditions. For all countries, the data appear to support the hypothesis that the system contains UIP and PPP relations. However, each of the international parity hypotheses is strongly rejected when formulated in isolation and jointly, leading to repudiation of the CHEER validity. Further, it is found that the results are data frequency-dependent and suggest that higher frequencies should be used as they provide additional information. Originality/value: First, the literature on equilibrium exchange rates in BRICS economies is scanty. BRICS economies are large-emerging economies and one of the fastest growing economies and thus entail an empirical enquiry on their exchange rates. Second, the empirical application has mainly used monthly data to test the validity of the CHEER approach. However, data frequencies could affect the results. To the best of the authors’ knowledge, this study is the first to check data frequency-dependency in examination of the CHEER approach

Do foreign banks in India respond to global monetary policy shocks? A SVAR analysis

his paper aims to examine the role of foreign banks in transmitting global monetary policy shocks to India. Further, the authors try to explore the international bank lending channel and analyze the impact of global monetary policy on Indian macroeconomic variables. Design/methodology/approach: The authors use a structural break unit root test and structural vector autoregression on monthly data from 1998 to 2018. Findings: The study finds that the global monetary policy is significantly determining foreign banks’ lending in India; the evidence of a portfolio re-balancing channel in the process of global monetary policy transmission to the Indian economy; the exchange rate is significantly explaining the foreign bank credit dynamism in India; and evidence of international monetary policy spillover to the Indian economy. Originality/value: This is the first attempt to analyze the role of foreign banks in the transmission of global monetary policy shocks to India, where the literature availability is limited. The finding of ineffective domestic monetary policy on foreign bank lending opens the need for an in-depth and diversified analysis of the role of foreign banks in the transmission of domestic monetary policy

Causal relationships between Foreign Institutional Investments and stock returns in India

This paper examines the dynamic interaction between FII flows and stock market returns in Indian stock market. Using daily data from January 2003 to February 2007, VAR framework and Granger causality test, we find the existence of bidirectional causality between FII flows and stock returns. Further analysis through impulse response function indicates that FII flows are more stock return driven. We also find support for information revelation hypothesis and momentum trading hypothesis.FII flows; stock returns; VAR; Granger causality; information revelation hypothesis; momentum trading strategies; foreign institutional investments; Indian stock market; impulse response function.