Does Capital Account Openness Lower Inflation?

This paper investigates the relationship between capital account openness and inflation since the 1980s. It argues that widespread capital account liberalization during the last two decades appears to have contributed to the worldwide disinflation observed during the same period. The paper builds a theoretical model to motivate the presence of a negative link between financial integration and inflation. It tests the prediction of the theoretical model by employing static and dynamic panel data procedures. Financial integration appears to discipline monetary authorities, or to help them convince the private sector that they will be more disciplined in the future.capital account openness, inflation, Seignorage, Discipline Effect

Does Capital Account Openness Lower Inflation?

This paper investigates the relationship between capital account openness and inflation since the 1980s. It argues that widespread capital account liberalization during the last two decades appears to have contributed to the worldwide disinflation observed during the same period. The paper builds a theoretical model to motivate the presence of a negative link between financial integration and inflation. It tests the prediction of the theoretical model by employing static and dynamic panel data procedures. Financial integration appears to discipline monetary authorities, or to help them convince the private sector that they will be more disciplined in the future.Capital Account Openness, Inflation, Seignorage, Discipline Effect

Cost of Holding Excess Reserves - The Indian Experience

Most of the existing literature has used single reserve adequacy measures to evaluate the volume of excess reserves. In this paper, we employ empirical methods to generate a comprehensive reserve adequacy measure, incorporating the various objectives of holding reserves, and compare the actual reserve accumulation experience of various emerging markets with the prediction of our empirical model. Using this comprehensive reserve adequacy measure, we calculate the cost of holding excess reserves for India by looking at three different alternative uses of resources. We find that India is foregoing asmuch as 2% of its GDP by accumulating reserves instead of employing resources in alternative uses.Reserve Holdings, Reserve Management

Management of International Capital Flows: The Indian Experience

In this paper we devise quantitative techniques to analyze the management of foreign capital flows in India over the past three decades. The paper argues that India's overall approach towards liberalization of the capital account can be characterized as gradualist and calibrated, whereby certain agents and flows have been accorded priority in the liberalization process, from the viewpoint of ensuring financial stability. A cross country analysis indicates that the calibrated approach has resulted in India being ranked towards the lower end of the spectrum in terms of capital account openness. We analyze the extant regulations governing different types of foreign capital flow, and highlight the evolution of various types of capital flows over the recent period. To evaluate Indian macroeconomic management in the face of capital flows, we quantify the various policy options under the classic problem of "impossible trinity". We find that India, like other emerging markets, has also been confronted with the various alternatives under "impossible trinity" and has chosen to adopt an intermediate regime, juggling the objectives of monetary independence, exchange rate stability, and an open capital account as per the needs of the economy.Capital Flows; Impossible Trinity; Macroeconomic Management

The Current State of Financial and Regulatory Frameworks in Asian Economies: The Case of India

Despite having a low exposure to the toxic assets involved in the sub-prime crisis and a gradualist approach towards liberalization of the financial sector, certain parts of the Indian financial sector were significantly affected by the global financial crisis. Though Indian policymakers reacted in a proactive manner and introduced a host of measures to counter the adverse effects of the financial crisis, the recovery has not been uniform; several markets and sectors are still reeling from the crisis’ aftershocks. The proposed Basel III norms are going to have a significant impact on the Indian financial sector.india global financial crisis; indian financial sector; basel iii norms

CAPITAL ACCOUNT OPENNESS AND INFLATION: A PANEL DATA STUDY FOR THE 1990s

This paper aims to look at the relationship between capital account openness and inflation in the 1990s. It argues that widespread capital account liberalization during the early 1990s appears to have contributed to the world-wide disinflation observed during that decade. The paper attempts to provide a theoretical and empirical evidence for a strong negative link between capital account liberalization and disinflation. Capital account openness appears to discipline monetary authorities, or to help them convince the private sector that they will be more disciplined in the future.Capital Account, Openness and Inflation

Towards A Competitive Manufacturing Sector

The Indian manufacturing sector has grown at an impressive average rate of 9.5 per cent annually since 2003-04. Its sustained growth is crucial for generating employment opportunities needed to absorb the rapidly expanding workforce. In this context, this paper reviews the current state of the sector and focuses on determinants of its competitiveness. The paper finds that Indian manufacturing sector exhibits a great deal of regional variation and a marked dualism between the organized and the unorganized segments in terms of both productivity and wage levels. The level of labour absorption in the organized manufacturing sector has been weak as reflected in the declining labour intensity in this sector. This does not augur well for achieving inclusive growth. We also find that although there have been significant changes in the composition of exports in the last 20 years; India is still a very small player at the global level, especially in knowledge intensive and advanced technology products. Finally, the paper explores Indias potential for transforming itself into a hub of mass manufacturing. We find that the main constraints in doing so have been the low level of R&D, relative lack of skilled personnel and relatively low FDI levels.manufacturing, competitiveness, mass manufacturing

Capital Flows and the Impossible Trinity: The Indian Experience.

In this paper we devise quantitative techniques to analyze the management of foreign capital flows in India over the past three decades. The paper argues that India0s overall approach towards liberalization of the capital account can be characterized as gradualist and calibrated, whereby certain agents and ows have been accorded priority in the liberalization process, from the viewpoint of ensuring financial stability. A cross country analysis indicates that the calibrated approach has resulted in India being ranked towards the lower end of the spectrum in terms of capital account openness. We analyze the extant regulations governing different types of foreign capital flow, and highlight the evolution of various types of capital ows over the recent period. To evaluate Indian macroeconomic management in the face of capital flows, we quantify the various policy options under the classic problem of "impossible trinity". We find that India, like other emerging markets, has also been confronted with the various alternatives under "impossible trinity" and has chosen to adopt an intermediate regime, juggling the objectives of monetary independence, exchange rate stability, and an open capital account as per the needs of the economy.

Feasibility of an Asian Currency Unit

In this paper we evaluate the feasibility of a common Asian Currency Unit (ACU) involving countries of East and South Asia. We analyze the various properties of an ACU and calculate its value using weighted averages of the values of Asian currencies. Looking at the movement of individual Asian currencies vis-a-vis the ACU, we find that there have been severe misalignments among the Asian currencies during the past seven years. We discuss the possibility of the Rupee figuring in the ACU and identify the major economic, political and historical impediments in the way of faster acceptance of ACU in the region. We point out the various strategies that could be employed to facilitate faster adoption of ACU. These include creating certain institutional safeguards as well as strengthening the existing ones. Finally, we highlight some ways to promote the use and acceptability of the ACU and also emphasize the importance of conceiving a larger framework of participating countries, including India.Asian Currency Unit, Regional Integration, Monetary cooperation