Cash and the Economy: Evidence from India’s Demonetization
We analyze a unique episode in the history of monetary economics, the 2016 Indian “demonetization.” This policy made 86\% of cash in circulation illegal tender overnight, with new notes gradually introduced over the next several months. We present a model of demonetization where agents hold cash both to satisfy a cash-in-advance constraint and for tax evasion purposes. We test the predictions of the model in the cross-section of Indian districts using several novel data sets including: the geographic distribution of demonetized and new notes for causal inference; nightlight activity and employment surveys to measure economic activity including in the informal sector; debit/credit cards and e-wallet transactions data; and banking data on deposit and credit growth. Districts experiencing more severe demonetization had relative reductions in economic activity, faster adoption of alternative payment technologies, and lower bank credit growth. The cross-sectional responses cumulate to a contraction in aggregate employment and nightlights-based output due to the the cash shortage of at least 2 p.p. and of bank credit of 2 p.p. in 2016Q4 relative to their counterfactual paths, effects which dissipate over the next few months. Our analysis rejects money non-neutrality using a large scale natural experiment, something that is yet rare in the vast literature on the effects of monetary policy.
Monetary Transmission in Developing Countries : Evidence from India
We examine the strength of monetary transmission in India, using a conventional structural VAR methodology. We find that a tightening of monetary policy is associated with a significant increase in bank lending rates and conventional effects on the exchange rate, though pass-through to lending rates is only partial and exchange rate effects are weak. We could find no significant effects on real output or the inflation rate. Though the message for the effectiveness of monetary transmission in India is therefore mixed, our results for India are more favorable than is often found for other developing countries.
Democracy and Reforms
Empirical evidence on the relationship between democracy and economic reforms is scarce, limited to few reforms and countries and for few years. This paper studies the impact of democracy on the adoption of economic reforms using a new dataset on reforms in the financial, capital, public, and banking sectors, product and labor markets, agriculture, and trade for 150 countries over the period 1960?2004. Democracy has a positive and significant impact on the adoption of economic reforms but there is no evidence that economic reforms foster democracy. Our results are robust to the inclusion of a large variety of controls and estimation strategies.
Trade Liberalization and Wage Inequality in India: A Mandated Wage Equation Approach
This paper uses an empirical approach based on the “mandated wage equations” to examine the relationship between trade liberalization and urban manufacturing wages in India. The main result in the paper is that trade reforms have been associated with a rise in the relative wages of medium-skilled workers (defined as having completed secondary schooling). We do not find any evidence for trade reforms to be associated with an increase or decrease in wage inequality between low and high-skilled workers. The results are consistent with the predictions of the Stolper-Samuelson theorem.
Has India’s Growth Story Withered?
This paper analyzes the growth performance in India over the past two decades. We use several statistical and economic methodologies to estimate the growth rate of potential output. The annual growth rate of potential output is estimated for 2011 to be in the range of 7.7-8.2 percent. All the estimation techniques suggest that there was a big boost to potential growth between 2002 and 2007, but since then it has not increased significantly. Based on statistical approaches and conditional on moderate annual growth forecasts of 7-7.5 percent between 2012 and 2014, there is some evidence that the recent decline in growth is likely to be driven by structural factors. Most of the methodologies indicate that output gap continues to be positive, suggesting caution in further loosening the monetary policy stance. Overall, while the Indian growth story may/may not have withered, the evidence does give indications that the growth story may have faltered.
India’s External Sector: Do We Need To Worry?
The deterioration in India’s current account has led to a series of debates in the policy arena relating to sustainability, the importance of exchange rates in influencing the trade balance, and the role of high and rising inflation. Against this background, this article takes a step back and analyses the performance of the external sector in India since 1990. It estimates the sustainable current deficit to GDP ratio to be 2.3%. Importantly, even to sustain a 2.3% CAD, India would need net capital infl ows of the order of at least $50-70 billion annually over the next five years. Given the uncertainty around both the push factors (e g, rising global risk aversion) as well as the pull factors (slower growth in India) that determine capital flows, attracting such magnitudes of flows could very well be an uphill task.
Political Representation and Crime: Evidence from India’s Panchayati Raj
Using state-level variation in the timing of political reforms, we find that an increase in female representation in local government induces a large and significant rise in documented crimes against women in India. Our evidence suggests that this increase is good news, driven primarily by greater reporting rather than greater incidence of such crimes. In contrast, we find no increase in crimes against men or in gender-neutral crimes. We also examine the effectiveness of alternative forms of political representation. Large scale membership of women in local councils affects crime against them more than their presence in higher-level leadership positions. (JEL D72, J16, K42, O15, O17)
Explaining Inflation in India: The Role of Food Prices
This paper conducts a forensic examination of inflation in India with a focus on food price inflation, using a disaggregated high-frequency commodity level dataset spanning the last two decades. First, we document stylized facts about the behavior of overall inflation in India. We establish that low inflation has historically been a rare occurrence in the Indian economy in the last two decades; the long-term trend in the inflation rate exhibits a U-shaped pattern with a structural break in the trend in 2000 and an inflection point in 2002. The long-term trend in food inflation has followed a pattern similar to overall inflation. Domestic and international food price inflation rates have been moderately correlated, though there is significant variation across commodities based on their tradability. Furthermore, we find food price inflation to be consistently higher than non-food, quite persistent, and having a significant pass-through to non-food inflation. Further, the price of food relative to non-food co-moves strongly with aggregate inflation rate. Next, we explicitly quantify the contribution of specific commodities to food price inflation. We find that animal source foods (milk, fish), processed food (sugar, edible oils), fruits and vegetables (e.g. onions) and cereals (rice and wheat) are the primary drivers of food price inflation. Finally, we conduct case studies of some of the top contributors to food price inflation. Combining the insights from macro as well as micro analyses, the paper suggests specific policy implications.