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Macroeconomic Issues in India

Paper Session

Saturday, Jan. 6, 2024 10:15 AM - 12:15 PM (CST)

Convention Center, 222
Hosted By: Association of Indian Economic and Financial Studies
  • Chair: Keshab Bhattarai, University of Hull

The Rise of Regional Financial Cycle and Domestic Credit Markets in Asia

Chiara Banti
,
University of Essex
Udichibarna Bose
,
University of Essex

Abstract

This paper documents the emergence of a regional financial cycle in Asia, evidenced by commonality in regional bank flows, and its impact on domestic credit. Using a dataset of 24,169 non-financial Indian firms for the period 2001-2019, we establish that the regional financial cycle has a positive and significant impact on domestic corporate debt, as opposed to an insignificant effect on foreign currency debt, after controlling for the global financial cycle. We find that both interbank markets and monetary policy in the region act as transmission channels for this effect. Amongst the regional lenders, we show that Japanese financing conditions play a leading role in the dynamics of the regional financial cycle. We also show that the regional cycle is channelled not only by affiliates of foreign banks, but also by domestic banks. Finally, regulators can manage this exposure through macroprudential policy, selective capital controls and floating currency regimes.

Exchange Rate Pass-Through and Monopsony Power in a Large Emerging Economy

Abhishek Kumar
,
University of Southampton and Centre for Social and Economic Progress
Sushanta Mallick
,
Queen Mary University of London

Abstract

The exchange rate pass-through (ERPT) literature has not considered the
labour market effects of exchange rate changes. Using a product-level data set
from India, we find significant but incomplete exchange rate pass-through to export
and import prices. These incomplete pass-through estimates imply significant
exogenous changes in prices, generating gains for producers. Further, with a plantlevel
Indian data set, we show that these gains, arising from currency depreciation,
are shared with labour as reflected in lower markdown, and this price gain brings
their wages closer to the competitive wage. As expected, the gains for labour from
depreciation are higher in the case of exporting plants and lower for plants using
imported inputs. These results suggest significant welfare effects of exchange rate
movements which have not been documented in this literature.

 Do Changes in Risk Perception Predict Systemic Banking Crises?

Saktanil Roy
,
Athabasca University

Abstract

This paper examines if incorporating changes in financial market risk perception improves the predictive power of an early warning system for systemic banking crises. In explaining systemic banking crises, the existing literature identifies inflating stock and real estate bubbles, credit booms, and surges in net capital inflows as the common drivers. Employing panel logit models to predict the postwar systemic banking crises in advanced economies to occur within three-four years, the paper's key finding is that even after controlling for the effects of surges in asset and credit markets and net capital inflows that are above the long-run trends for an extended period, market participants' increasing underestimation of downside risks is a significant predictor of these crises. Incorporating changes in risk perception improves the prediction accuracy of the model significantly. This finding is robust across alternative prediction horizons, systemic crisis definitions, and risk perception measures. Consistent with the recent theoretical developments in the form of the diagnostic expectations hypothesis for financial markets, the interpretation is that recent recurring good news about financial markets and the broader economic trends for sufficiently long periods lead to growing neglect of tail risks and riskier financial transactions, raising systemic risk and the likelihood of a financial crisis. The finding suggests monitoring financial market risk perception, in addition to the conventional indicators, to predict and avert systemic banking crises.

Trade, Growth and Poverty in South Asia

Keshab Bhattarai
,
University of Hull

Abstract

Impact of international trade has differed significantly among South Asian countries in recent years. While India and Bangladesh doubled their export ratios to around 26 percent of GDP during the three decades, Pakistan, Nepal and Sri Lanka are struggling to maintain them even at 1995 level. International trade has contributed to higher rate of growth of per capita income in Bangladesh, India and Bhutan. Sri Lanka had done well initially but it did not have any growth impacts as in Nepal or Pakistan in recent years. The rising trade ratios, however, have raised both inequality and poverty of the low income households in the bottom three quintiles of income distribution. In absolute terms the income of poor households had grown along with the per capita income though the gap between the rich and poor is widening. While increased trade is likely to bring more growth in these countries, the structural imbalances between imports and exports and income gaps between rich and poor are likely to rise even further in coming years. South Asian countries are still far away from meeting the millennium development goals (MDG). Poverty level increases substantially in all countries when $6.85 a day criteria is used to measure the poverty.
JEL Classifications
  • E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
  • P5 - Comparative Economic Systems