Demand for Foreign Exchange Reserves in India: A Co-integration Approach

Using cointegraion and vector error correction approach, we estimate India’s demand for foreign exchange reserves over the period 1983:1-2005:1. Our results establish that the ratio imports to GDP, the ratio of broad money to GDP,exchange rate flexibility and interest rate differential determine India’s long-run reserves demand function. Our empirical results show that reserve accumulation in India is highly sensitive to capital account vulnerability and less sensitive to its opportunity cost. The speed of adjustment coefficient of vector error correction model suggests that Reserve Bank of India has to engage in more active reserve management practices.foreign exchange reserves; capital account vulnerability; current account vulnerability; cointegration

EFFECTIVENESS OF EARLY WARNING MODELS: A CRITICAL REVIEW AND NEW AGENDA FOR FUTURE DIRECTION

This paper suggests a new agenda for constructing early warning models (EWMs) to enhance their effectiveness in predicting financial crises. The central argument of the new agenda aims to eradicate the weaknesses of existing EWMs, since their failure to predict the global financial crisis of 2007–2008 demonstrates the need to improve their efficiency. We document the history of EWMs and propose a new agenda as follows: 1) the accurate measurement of a financial crisis, 2) implementation of a fourthgeneration crisis model to capture the dynamic nature of the financial crisis, and 3) the inclusion of interconnectedness/contagion variables as explanatory variables for the financial crisis.This paper suggests a new agenda for constructing early warning models (EWMs) to enhance their effectiveness in predicting financial crises. The central argument of the new agenda aims to eradicate the weaknesses of existing EWMs, since their failure to predict the global financial crisis of 2007–2008 demonstrates the need to improve their efficiency. We document the history of EWMs and propose a new agenda as follows: 1) the accurate measurement of a financial crisis, 2) implementation of a fourthgeneration crisis model to capture the dynamic nature of the financial crisis, and 3) the inclusion of interconnectedness/contagion variables as explanatory variables for the financial crisis

Did the policy responses influence credit and business cycle co-movement during the COVID-19 crisis? Evidence from Indonesia

This paper examines the responses of credit and business cycle to various policy actions of the Government of Indonesia during the COVID-19 crisis. Specifically, the paper addresses two key questions (1) How do the credit and business cycle behave during the COVID-19 crisis in Indonesia? (2) Do the central bank and government policy responses effectively stabilize the credit and business cycle? Using the concordance Index and DCC-GARCH methodology, we found that the COVID-19 crisis increased Indonesia's credit and business cycle co-movements. Similarly, using the mixed data sampling regression technique, our findings suggest fiscal policy measures and government support help the business cycle revival during the COVID-19 pandemic. However, the monetary policy transmission is weak during the pandemi

What is the value of corporate sponsorship in sports?

This paper investigates the stock market reaction to investor mood swings resulting from the Indian Premier League (IPL) cricket matches. We find that stocks listed on the Bombay Stock Exchange (BSE) that sponsor the IPL cricket are unaffected by the cricket matches. This finding is robust along two lines: (a) the effect is insignificant both statistically and economically which we demonstrate using a simple trading strategy; and (b) results hold across a wide range of portfolios. Our results, both statistical and trading strategy-based, suggest that the portfolios of companies that sponsor cricket in India are efficient. Our findings stand in sharp contrast to the evidence obtained by the broader sports literature suggesting that sports actually impact stock returns, driven principally by psychological factors

Rebalancing through expenditure and price changes

pre-printThis paper puts forth a Neo-Kaleckian open economy model of two countries in order to investigate adjustment of US-China external imbalances. First, a stylized fixed mark-up model is presented, and discussed based on graphical analysis. Second, we present estimates of bilateral income and price elasticities of imports. Third, we employ the model for simulation analysis. Specifically, we randomly distribute expenditure change across government, investment and imports and calculate the exchange rate change necessary to lead to an equal change in the bilateral external imbalance. Doing so repeatedly allows to estimate probability distributions of endogenous variable changes

The economics of COVID-19 pandemic: A survey

Through a survey of the literature on the economics of the coronavirus (COVID-19) pandemic, this study explores the effects of the pandemic and proposes potential policy directions to mitigate its effects. Our survey reveals that adverse economic effects have been observed due to the COVID-19 pandemic in addition to fatalities. Furthermore, the survey indicates the need for greater coordination at national and international levels. This study concludes by suggesting coordination among monetary, macroprudential, and fiscal policies (trio) to mitigate the adverse economic effects of COVID-19. Finally, this study explores potential directions for future research

Reassessing the dynamics between exchange, oil, stock markets and uncertainty during COVID-19 in emerging market economies

This study reassesses the dynamic relationship between stock, oil, foreign exchange markets, and COVID-19-induced uncertainty. For estimation, we utilize the monthly data from January 2020 to December 2021 and utilize panel vector autoregression econometric techniques in emerging market economies. The empirical findings reveal that heightened uncertainty during the pandemic had a negative impact on stock and oil, and foreign exchange markets. Findings further suggest that uncertainty during the pandemic slanted the relationship between oil and stock and foreign exchange markets due to the precautionary approach followed by economic agents. • COVID-19 uncertainty negatively impacted the oil, stock, and foreign exchange markets. • Uncertainty had a non-linear impact on stock and oil prices. • During the initial period of COVID-19, uncertainty distorted the relationship between oil, stock and exchange markets

External shocks, consumption-smoothing and capital mobility in India: evidence from an intertemporal optimization approach

We examine the solvency of India’s current account (CA) in the post-liberalization period using intertemporal optimization approach to the CA. Using quarterly data ranging from 1996Q1 to 2014Q2, we estimate a benchmark consumption-smoothing model and an extended model that incorporates external shocks. Overall, we find that the predicted optimal CA in both the models can track the actual CA movements and the extended model performs better over the benchmark model. Further, we also find that the optimal CA is more volatile than the actual CA which implies that the capital flows have been less than optimal and thus makes an interesting case for further liberalization of the capital account. Our findings suggest that policies aimed at further liberalization of capital flows will allow larger CA deficits to achieve higher economic growth since it will help agents to further smoothen their consumption without worrying about risks associated with insolvency

The Effectiveness of Central Bank Intervention in the Foreign Exchange Market: Evidence from India

This thesis empirically analyzes the effectiveness of RBI intervention in the foreign exchange market. The study framed two objectives related to the central bank intervention. The first objective deals with analyzing the effectiveness of RBI intervention on exchange rate level and volatility. And the second deals with the relevance of asymmetric intervention on exchange rate level and volatility. Using monthly data from July 1995 to July 2013 and GARCH methodology, the thesis empirically estimates two models. First model estimates the effect intervention on the exchange rate level and volatility by measuring intervention as net purchases of US dollar by the RBI. In second model included both purchases and sales of US dollar as a proxy the intervention to analyze the effect of asymmetric intervention on exchange rate level and volatility. The empirical findings suggest that the RBI intervention is not effective in influencing the level of Rupee/USD exchange rate. However, the study found that the RBI intervention is effective in reducing the volatility. The empirical findings also show that intervention by purchase of USD by RBI significantly reduces volatility whereas intervention by sales significantly increases volatility in exchange rate. These findings confirm the asymmetric effect of intervention in exchange rate volatility in the Indian context

Causal relationships between the capital account and the current account: an empirical investigation from India

This article provides an empirical investigation of the causal relationship between the current account (CA) and the capital account (KA) in the case of Indian economy. The results indicate the nonexistence of causal relationship between the CA and the KA. Furthermore, we examine the causal relations between the components of the KA and the CA along with exchange rate as the linking factor between them. The causal findings, in the above mentioned case, show different results. Our finding suggests that there exist a causal relationship from Nondebt flows to the CA via the real effective exchange rate. This implies that decomposition of the KA helps in identifying the source of flows that drives the CA the most. The results also indicate that volatile capital flows may deteriorate the CA balance and therefore, emphasis should be laid on improving the soundness of the financial sector before moving towards the full KA convertibility