Macroeconomics and Financial Sector in India

Paper Session

Saturday, Jan. 7, 2017 12:30 PM – 2:15 PM

Sheraton Grand Chicago, Jackson Park
Hosted By: Association of Indian Economic and Financial Studies
  • Chair: Amitrajeet A. Batabyal, Rochester Institute of Technology

Does Social Identity Matter in Consumption Distance? Household-Level Evidence in Post-Reform India

Prashant Gupta
,
Queen Mary University of London
Sushanta Mallick
,
Queen Mary University of London
Tapas Mishra
,
University of Southampton

Abstract

Does consumption distance as a measure of social alienation reveal the effect of social identity?<br />
To characterize this, we examine the effect of different identities on their consumption<br />
level and distance measured as a z-score, in order to show whether the consumption level or<br />
distance across the distribution reveals any heterogeneous class behavior in consumption<br />
pattern. Using India's household-level data on consumption expenditure covering three major<br />
survey rounds since the inception of the reform period, we find that marginalized social<br />
groups and minority religious groups tend to be alienated across the distribution and over<br />
time, controlling for the effects of education, age, and household type. Since households<br />
with education tend to have higher per capita consumption relative to their group mean, we<br />
examine for the first time with NSS data the problem of endogeneity, using the number of<br />
schools at the district level as an exogenous instrument for educational attainment. Even<br />
with endogeneity correction, both marginalized social groups and minority religious group<br />
still remain alienated across the distribution. As a further robustness, whether their identity<br />
is the reason why these groups are alienated, we undertook a counterfactual decomposition<br />
by rewarding the socio-economic and demographic characteristics of one social group to another,<br />
and found that the estimated consumption difference or gap is observed to rise over<br />
time and across the distribution which also remain robust even in a matched sample of individual<br />
characteristics. Rise in such gap distributed heterogeneously across groups may lead<br />
to volatile social dynamics, with historically underprivileged classes being socially alienated,<br />
implying a possible trade-off between economic prosperity and social cohesion.

Technology Shocks and Business Cycles in India

Shesadri Banerjee
,
Centre for Studies in Social Sciences
Parantap Basu
,
Durham University

Abstract

What are the driving forces of business cycle fluctuations? How do these drivers interact with
the movement of output? What are the determining factors for the relative importance of these
drivers in the business cycle? We address these three research questions considering Indian economy as the test bed. A small open economy New Keynesian DSGE model is developed that features
standard frictions such as external habit formation, investment adjustment cost, home bias in
consumption and investment, and staggered price setting behavior of firms. The model includes
two technology shocks, namely, total factor productivity (TFP), investment specific technology
(IST), and three demand side shocks, fiscal spending, home interest rate, and foreign interest rate.Using the Bayesian methodology, we estimate the model for the annual data over the period o
1971 . 2010, and for the sub-samples of pre-liberalization (1971 - 1990) and post-liberalization
(1991 - 2010) periods. Our analysis reveals three key results. First, output correlates positively
with the TFP, but negatively with the IST. Second, TFP and IST occupy the first and second
most important roles in determining aggregate fluctuations in India. In contrast, the demand side
disturbances play a limited role. Finally, the sub-sample analysis indicates that though TFP shocks dominate in absolute term, its relative importance vis-à-vis IST has declined in driving fluctuations during the post-liberalization era. It is found that structural shifts of nominal friction and relative home bias for consumption to investment in the post-liberalization period can account for the rising predominance of the IST shocks in India.
<br />

Regulatory Reforms and Changes in Capital and Risk in Indian Banks

Usha Nair-Reichert
,
Georgia Institute of Technology
Vijaya Subrahmanyam
,
Mercer University
Srikar Polasanapalli
,
Birla Institute of Technology and Science

Abstract

We are able to study large, medium and small banks, both Indian and foreign in the public and private sectors to better understand the heterogeneity in the impact of Basel regulations on banks. We employ corporate governance measures and incentive compensation to study their impact on bank capital requirements and on the risk profiles of Indian banks. As the adoption of the Basel Capital Accord in 1988 is a material event affecting the capital structure of banks, the study of Indian banks provides the template to examine the joint impact of bank capital requirements, ownership structure and incentive compensation on bank risk taking.

Mutual Fund Performance Using Unconditional Multi-Factor Models: Evidence From India

Pankaj K. Agarwal
,
School of Management Sciences-Lucknow
H. K. Pradhan
,
XLRI-Xavier School of Management

Abstract

In contrast to developed countries Indian capital markets do not exhibit strong efficiency and therefore it appears possible that fund managers beat the benchmarks. We examine existence of superior performance of open-ended equity mutual funds in India with various models including traditional CAPM-based as well as recent Fama-French-Carhart factors-based. We use a survivorship-bias free database including all schemes since inception till recently. We found evidence of selectivity and timing skills in Indian fund managers. Our results are robust to changes in benchmarks, return frequency and effects of heteroscedasticity and autocorrelation.

Realized Volatility and Correlation in the Indian Stock Market

Dimitrios Vortelinos
,
University of Lincoln
Shrabani Saha
,
University of Lincoln

Abstract

The present paper examines the properties of realized volatility and correlation series in the Indian stock market. The properties are normality, long-memory, asymmetries, jumps and heterogeneity. Most of realized volatility and correlation series are near normally distributed, with some evidence of persistence. Asymmetries are also evident in both volatilities and correlations. Both jumps and heterogeneity properties are significant; whereas, the former is more significant than the latter.

Keywords: Indian stock market; Realized volatility; Correlation.

Booms, Crises and Recoveries

Valerie Cerra
,
International Monetary Fund
Sweta C. Saxena
,
International Monetary Fund

Abstract

The recent literature on “secular stagnation” (rekindled by Larry Summers 2014) is seeking explanations for the continuous downward revision in the estimates of U.S. potential output in the aftermath of the Great Recession. Such output gaps, as created by using HP filters, are purely mechanical. So what does it all mean for policymaking? In this paper, we provide answers to the following questions: (1) what is the output cost associated with crises and recessions? (2) Is growth unsustainable before a crisis/recession? (3) How do countries adjust in the aftermath of crises? (4) What implications do output losses have for cost-benefit analysis for regulatory reforms, the conduct of monetary policy, and the optimal level of FX reserve holdings?
Discussant(s)
Banani Nandi
,
AT&T Laboratories
Subarna Samanta
,
College of New Jersey
Amit Ghosh
,
Illinois Wesleyan University
Meenakshi Rishi
,
Seattle University
Keshab Bhattarai
,
University of Hull
Saktinil Roy
,
Athabasca University
JEL Classifications
  • G1 - General Financial Markets