A VAR Model of Monetary Policy and Hypothetical Case of Inflation Targeting in India

The empirical VAR literature on identification and measurement of the impact of monetary policy shocks on the real side of the economy is fairly comprehensive for developed economies but very limited for emerging and transition economies. In this study, we propose an identification scheme, for a developing economy taking India as a case study, which is able to capture the monetary transmission mechanism without giving rise to any empirical anomalies. We use a VAR approach with recursive contemporaneous restrictions and identify monetary policy shocks by modelling the reaction function of the central bank and structure of the economy. The effect of monetary policy shocks on the exchange rate and other macroeconomic variables is consistent with the predictions of a broad set of theoretical models. This set-up is used to build a hypothetical case of inflation targeting where the monetary policy instrument is set after looking at the current values of inflation only. This is in contrast with the „multiple indicator approach‟ currently followed by Reserve Bank of India. This hypothetical scenario of inflation targeting suggests a sharper response of the interest rate (monetary policy instrument) to shocks and strengthening of the exchange rate channel in transmission of interest rate impulses. This study also provides some useful implications on the type of theoretical framework which can be used to model the evolution of monetary policy for a developing economy like India.India, Inflation Targeting, Monetary policy, VAR

PRE-CONDITIONS FOR INFLATION TARGETING IN AN EMERGING ECONOMY - THE CASE OF INDIA

This article looks at the preconditions that an emerging economy needs to fulfill, before it can adopt inflation targeting as a monetary policy regime. The study is conducted using the Indian economy as a case study. We conduct an in-depth sector-wise analysis of the Indian economy to evaluate the independence of India's monetary policy from fiscal, external, structural and financial perspectives. Dominance from any of these sectors may divert monetary policy from the objective of maintaining price stability in the economy. Our analysis suggests that among the four dominance issues, the issue of 'structural dominance??? is the most acute for India. Supply shocks, hitting the economy due to structural bottlenecks, pose a major threat to the independent conduct of monetary policy. This study concludes that inflation band targeting with a wide target range would be a feasible monetary policy option for India.India, Inflation Targeting, Monetary policy, Fiscal Dominance, VAR, GFVD

Economic Returns to Schooling for China’s Korean Minority

This paper examines economic returns to schooling for China’s Korean minority in the urban labour market using ordinary least squares (OLS) and two-stage least squares. The OLS estimates of the returns to schooling are similar to findings from recent studies for the Chinese urban labour market. We use father’s education, mother’s education and spouse’s education to instrument for education. The two-stage least squares estimates are considerably higher than the OLS estimates for returns to schooling and slightly higher than existing two-stage least squares estimates of the returns to schooling for the Chinese urban labour market. The two stage least squares estimates of the returns to schooling for the Korean minority living in urban areas are high compared with the Asian average and world average. The economic returns to schooling reported in this study assists to explain why private demand for education among the Korean minority in China is strong and provides a justification for the Korean minority’s focus on educational attainment.

AN EXAMINATION OF THE IMPACT OF INDIA'S PERFORMANCE IN ONE-DAY CRICKET INTERNATIONALS ON THE INDIAN STOCK MARKET

This study examines the impact of the Indian cricket team's performance in one day international cricket matches on returns on the Indian stock market. The main conclusion of the study is that there exists an asymmetric relationship between the performance of the Indian cricket team and stock returns on the Indian stock market. While a win by the Indian cricket team has no statistically significant upward impact on stock market returns, a loss generates a significant downward movement in the stock market. When Sachin Tendulker, India's most popular cricketer, plays the size of the downward movement in returns is larger.Cricket, India, Stock Market, Stochastic Dominance, Investor Psychology.

The Backward Incidence of Pollution Regulation on Workers’ Wages: Empirical Evidence From Shanghai

In this study we examine the extent to which firms pass back the cost of pollution regulation to workers in the form of lower wages using a unique matched employer-employee dataset for Shanghai. The benefits and costs of pollution regulation in China are important topics to study as China comes under increasing pressure to move from a single-minded focus on energy-driven economic growth to a more balanced approach to economic growth. The benefits of such a shift, particularly in terms of health, are relatively well-studied, but the costs are less so. The hip-pocket effect of pollution regulation on workers’ wages is particularly important given that it is likely to influence public support for a more balanced approach. Our main finding is that the reduction in average wages attributable to firms taking measures to control for pollution is between 13.8% and 18.8%, all things being equal.Wages, Pollution abatement, China

Exporting, R&D Investment and Firm Survival

This paper examines the effect of exporting on firm survival for a panel of Indian IT firms. We show that exporting has competing effects on firm survival. On the one hand, exporting and investing in productivity are complementary activities, while on the other exporting activity is an additional source of uncertainty for the firm. We show that both effects influence survival, but operate at different points in time. Specifically, the hazard facing exporters is higher than non-exporters in the initial phase following entry into the export market, reflecting the fact that exporters are particularly vulnerable to shocks in the start-up phase. However, over time, exporters benefit more from productivity gains than non-exporters and the hazard facing exporters falls below that confronting non-exporters.India, Firm survival, Information Technology, R&D, Exports

THE RELATIONSHIP BETWEEN FEMALE LABOUR FORCE PARTICIPATION AND FERTILITY IN G7 COUNTRIES: EVIDENCE FROM PANEL COINTEGRATION AND GRANGER CAUSALITY

This paper examines the relationship between the female labour force participation rate and total fertility rate for the G7 countries over the period 1960 to 2004 using panel unit root, panel cointegration, Granger causality and long-run structural estimation. The paper's main findings are that the female labour force participation rate and total fertility rate are cointegrated for the panel of G7 countries; that long-run Granger causality runs from the total fertility rate to the female labour force participation rate and that a 1-per cent increase in the total fertility rate results in a 0.4 per cent decrease in the female labour force participation rate for the G7 countries.fertility, female labour force participation, panel unit roots, panel cointegration, G7 countries.

INFLUENCE ACTIVITY AND ALLOCATION OF FIRMS' INTERNAL CAPITAL: EVIDENCE FROM AUSTRALIA

This paper analyzes how influence activities in the form of signal jamming affect the capital budgeting process of corporate organizations in Australia. First, the relationship between investment in the smallest division and its past performances is tested. The relationship is defined as investment sensitivity. Second, how the investment sensitivity varies as influence problems become more severe is examined. Finally, the relationship between compensation incentives for the large division manager and the investment sensitivity is reviewed. The findings suggest that investment sensitivity is positive for Australian firms. Mixed evidence is obtained between investment sensitivity and increase in the severity of influence problems when measures such as, relatedness and number of divisions are used. With increase in number of divisions, influence activity becomes more severe and headquarters relies more on public signal. However, with the increase in relatedness across divisions, influence problem increases and headquarters relies more on private information from manager of the large division. Evidence suggest that Australian firms provide high short term incentive payments to managers of large divisions to mitigate the influence activity problems and thus rely more on managerial recommendations for investing in smallest division as compared to noisy accounting measures.Influence activity, capital budgeting, compensation incentives