Understanding the International Rise and Fall of Inflation Since 2020
This paper analyzes inflation dynamics in 21 advanced and emerging market economies since 2020. We decompose inflation into core inflation as measured by the weighted median inflation rate, and headline shocks––deviations of headline inflation from core. Headline shocks occurred largely on account of energy price changes, although food price changes and indicators of supply chain problems also played a role. We explain the evolution of core inflation with two factors: the strength of macroeconomic conditions—measured by the unemployment gap, the output gap, and the ratio of job vacancies to unemployment—and the pass-through into core inflation from past headline shocks. We conclude that the international rise and fall of inflation since 2020 largely reflected the direct and pass-through effects of headline shocks. Macroeconomic conditions generally played a secondary role. In the United States, estimated price pressures from strong macroeconomic conditions had been greater than in other economies but have eased.
The Relationship Dilemma: Why Do Banks Differ in the Pace at Which They Adopt New Technology?
India introduced credit scoring technology in 2007. We study adoption by the two main types of banks operating there, new private banks (NPBs) and state-owned public sector banks (PSBs). NPBs start checking the credit scores of most borrowers before lending, soon after the technology is introduced. PSBs do so equally quickly for new borrowers but very slowly for prior clients, although lending without checking scores is reliably associated with more delinquencies. We show that an important factor explaining the difference in adoption is the stickiness of past bank structures and associated managerial practices. Past practices hold back better practices today.
India-US Trade and Investment: Have They Been Up To Potential?
This paper documents stylized facts about the evolution of trade and foreign direct investment (FDI) between India and the United States over the last four decades. We ask the question: does India-US trade and FDI deviate from its potential i.e. the level that would have been predicted by standard determinants? Using an augmented gravity model and a large sample of countries over 1970-2009, we find that while India’s exports to the US are 34% higher than predicted, US exports to India are in line with its potential. Notably, we find strong reversals in the nature of these trading relationships over time. India loses its over-trading status while US turns out to be under-exporting to India in the period after 1990. We also find significant variation in trade performance across product categories. For primary and intermediate goods during post-1990, US exports to India turn significantly below normal. Conducting similar analysis for bilateral FDI flows for the period 1985-2009, we show that while US direct investments in India are in line with predictions based on fundamentals, India has actually been an under-investor in the US market.
Monetary Transmission in Low-Income Countries: Effectiveness and Policy Implications
This paper reviews the monetary transmission mechanism in low-income countries (LICs). We use monetary transmission in advanced and emerging markets as a benchmark to identify aspects of the transmission mechanism that may operate differently in LICs. In particular, we focus on the effects of financial market structure on monetary transmission. The weak institutional framework prevalent in LICs drastically reduces the role of securities markets. Consequently, traditional monetary transmission through market interest rates and market-determined asset prices are weak or nonexistent. The exchange rate channel, in turn, tends to be undermined by heavy central bank intervention in the foreign exchange market. The weak institutional framework also has the effect of increasing the cost of bank lending to private firms. Coupled with imperfect competition in the banking sector, this induces banks to maintain chronically high excess reserves and to invest in domestic public bonds or (when possible) in foreign bonds. With the financial system not intermediating funds properly, the bank lending channel also becomes impaired. These factors undermine both the strength and reliability of monetary transmission, which has important implications for the conduct of monetary policy in LICs.
Exchange Rates and Wages in an Integrated World
We analyze how the pass-through from exchange rate to domestic wages depends on the degree of integration between domestic and foreign labor markets. Using data from 66 countries over the period 1981-2005, we find that the elasticity of domestic wages to real exchange rate is 0.15 after a year for countries with high barriers to external labor mobility, but about 0.40 in countries with low barriers to mobility. The results are robust to the inclusion of various controls, different measures of exchange rates, and concepts of labor market integration. These findings call for including labor mobility in macro models of external adjustment.