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.
We analyze the dramatic decline in India’s inflation over the last two years using an augmented Phillips Curve approach and quantify the role of different factors. Our results suggest that, contrary to popular perception, the direct role of lower oil prices in India’s disinflation was relatively modest given the limited pass-through into domestic prices. Instead, we find that inflation is a highly persistent process in India, reflecting very adaptive expectations and the backward looking nature of wage and support price-setting. As a consequence, we find that a moderation of expectations, both backward and forward, and a rationalization of Minimum Support Prices (MSPs), explain the bulk of the disinflation over the last two years.
In order to avoid the destructive 'beggar-thy-neighbour' strategies that emerged during the Great Depression, the post-war Bretton Woods regime attempted to prevent countries from depreciating their currencies to gain an unfair and sustained competitive advantage. It required fixed, but occasionally adjustable, exchange rates and restricted cross-border capital flows.
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.
International trade collapsed in 2008-09, particularly in countries that experienced a financial crisis. Was this collapse unique or part of a broader historical pattern? Using an augmented gravity model and 179 episodes from 1970-2009, we find that financial crises are associated with sharp declines in imports of the crisis country-19 percent, on average, in the year following a crisis-and this decline is persistent, with imports recovering to their gravity-predicted levels only after 10 years. In contrast, exports of the crisis country fall modestly and then remain close to or even above the predicted level. The protracted drop in imports post-crisis is consistent with evidence of a sustained depreciation of the exchange rate and impaired credit conditions following crises.
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