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Topics in Output, Income, and Economic Development

Paper Session

Friday, Jan. 3, 2020 8:00 AM - 10:00 AM (PST)

Manchester Grand Hyatt, Gaslamp C
Hosted By: Association of Indian Economic and Financial Studies
  • Chair: Amit Batabyal, Rochester Institute of Technology

Financial Frictions, Investment Dynamics, and the Lost Recovery

Valerie Cerra
,
International Monetary Fund
Ruy Lama
,
International Monetary Fund
Mai Hakamada
,
University of California-Santa Cruz

Abstract

One of the most puzzling facts in the wake of the Global Financial Crisis is that output across advanced and emerging economy recovered at a much slower rate than anticipated by most economists and forecasting agencies. The research objective of this paper will be to explain the mechanics behind slow recoveries after crises and recessions.

The paper will illustrate a key channel of this phenomenon. Namely, financial frictions in the banking intermediation sector amplify the effect of a shock such as a deterioration of credit quality or a fall in asset prices. Through financial accelerator mechanisms, the shock leads to a severe contraction of investment. In addition, using a DSGE model, we introduce technological improvement embodied in the purchase of new capital, which leads to the possibility of endogenous growth. The collapse in investment impacts the rate of aggregate productivity growth. A temporary banking crisis or negative financial shock that raises the cost of credit or impedes its volume results in a large decline in investment. The fall in the acquisition of technology through investment can potentially lead to a permanent or persistent impact on the level of output if the complementarity between embodied technology and capital is high enough.

The Effects of Central Bank Transparency on Output Volatility – A Closer Look at Developing Countries

Justine Wood
,
Loughborough University

Abstract

Beginning with New Zealand in 1989, there has been a vast increase in the amount of information publicly released by central banks. While it is almost universally agreed that the original move towards greater transparency by central banks has been beneficial, it is also possible that the benefits of transparency are limited. This paper seeks to investigate the relationship between central bank transparency and output volatility, with a particular focus on the relationship in developing countries. We also aim to determine if there are nonlinear and diminishing returns to transparency; the notion that there may be an optimal level of transparency is also considered.

Inequality Dynamics amidst Rapid Growth: A Post Liberalization Indian Perspective

Sriram Balasubramanian
,
International Monetary Fund
Rishabh Kumar
,
California State University-San Bernardino
Prakash Loungani
,
International Monetary Fund

Abstract

Economic growth in India has accelerated since the early 1990s. Recent evidence suggests two key features of this growth process; a reduction of aggregate poverty, and a highly skewed income distribution towards the top few percentiles. Due to lack of systematically comparable data, it is so far unclear how this evolution of inequality reflects the changing rural-urban profile and the growth of the organized sector. That is, how closely do these aggregate trends reflect the outcomes of a Lewis type process? We compute new series, using granular micro-data and two class statistical models, to provide answers to these questions. In particular, we show how gains from growth have changed the locational profile of the middle class and led to the emergence of a new upper class over 1990-2017. These results suggest an incomplete dual-sector transition, potentially exacerbating the rural-urban gap and aggregate inequality. Locational and class premiums matter significantly in twenty first century India and may be important for redistributive policy setting going forward. Furthermore, we also explore the role of digitization, if any, on the broader inequality story within the above-mentioned segments.

Liquidity and Price Discovery When Some Participants are Irrational: Evidence from the NSE

Padma Kadiyala
,
Pace University

Abstract

The paper examines the impact of irrational trading on price discovery, and liquidity of stocks listed on the Indian NSE exchange. The ability of a market to absorb irrational trading with little price impact is an important dimension of liquidity. Irrational trading in this study is driven by an exogenous event, namely, 90-minute periods during the trading day called Rahukalam,during which superstitious traders believe it is inauspicious to undertake commercial activity. Not all traders are superstitious however. The dynamic interaction between rational traders, superstitious traders and competititve market makers is measured using popular liquidity and price discovery measures . Our empirical evidence suggests that price discovery and liquidity are compromised during the Rahu period. Inclusion in the Nifty 50 stock index, and greater trading volume cushions the impact of the superstition on prices.

Preference Matching, Income, and Population Distribution in Urban and Adjacent Rural Regions

Amit Batabyal
,
Rochester Institute of Technology
Hamid Beladi
,
University of Texas-San Antonio

Abstract

We analyze the impact of preference matching and income on the distribution of the population in an aggregate economy consisting of an urban and an adjacent rural region. It costs
more (less) to live in the urban (rural) region. Individuals choose freely to live either in the urban
or in the rural region. They differ in their incomes. These incomes are uniformly distributed on the
unit interval. Our analysis leads to four results. First, when the cost differential parameter satisfies
a condition, both regions are occupied in the equilibrium. Second, when this parametric condition
holds, in any equilibrium in which the mean income of individuals varies across the two regions,
every resident of the rural region has a lower income than every resident of the urban region. Third,
there exists an income threshold and all individuals with higher (lower) incomes choose to live in
the urban (rural) region. Finally, in the equilibrium with income sorting, it is possible to make everyone better off by slightly modifying their residential choices.
Discussant(s)
Justine Wood
,
Loughborough University
Valerie Cerra
,
International Monetary Fund
Padma Kadiyala
,
Pace University
Banani Nandi
,
New York University
Sriram Balasubramanian
,
International Monetary Fund
JEL Classifications
  • O0 - General
  • E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit