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2022 | Book

Studies in International Economics and Finance

Essays in Honour of Prof. Bandi Kamaiah

Editors: Prof. Naoyuki Yoshino, Rajendra N. Paramanik, Assist. Prof. Anoop S. Kumar

Publisher: Springer Singapore

Book Series : India Studies in Business and Economics

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This festschrift volume presents discussions on contemporary issues in international economics and finance. It is aimed to serve as a reference material for researchers. There are two broad sections of the book -- International Macroeconomics and International Finance. The chapters in the International Macroeconomics section discuss critical topics like aggregate level macro model for India with a new Keynesian perspective, balance of payments, service sector exports, foreign exchange constraints for import demands, foreign direct investment and knowledge spill over, the relationship between forex rate fluctuation and investment, Institutional quality-trade openness-economic growth nexus, currency crises and debt-deficit relationship in the BRICS countries in the backdrop of COVID-19. Apart from these, various analytical issues related to macroeconomic policies are also covered in this section. The topics discussed includes the nature of forex market interventions, the issue of disinvestment and privatization, changing nature of fiscal policy, the inflation-growth nexus, macroeconomic simulation modelling, measuring core inflation, central bank credibility, monetary policy, inflation targeting, Infrastructure, trade, unemployment and inequality nexus. In the International Finance section, topics such as COVID-19 induced financial crisis, commodity futures volatility, stock market connectivity, volatility persistence, determinants of sovereign bond yields, FII and stock market volatility, cryptocurrency price formation, financialization of Indian commodity market, and a Keynesian view of the financial crisis are discussed. Overall, thirty two chapters in the volume discuss cutting edge research in the areas of the two sections.

A tour de force... a lucid guide to some of the diverse and complex issues in International Macroeconomics and Finance. This collection of scholarly works is a fitting tribute to respected Prof. Bandi Kamaiah and his enviable academic contributions.

- Prof. Y V Reddy, Former Governor, Reserve Bank of India

This volume comprising thoughtful essays by our leading scholars on some of important policy issues that India is facing is indeed a rich tribute to Professor Bandi Kamaiah . This book will greatly benefit the academic community as well as our policy makers.

- Prof. Vijay Kelkar, Chairman, 13th Finance Commission of India; Chairman, India Development Foundation, Mumbai, India

Noted economists from India and abroad gather to apply the rigorous searchlight that Professor Bandi Kamaiah used so effectively in his career. Major current topics in macroeconomics and international finance are effectively explored in the volume.

- Prof. Ashima Goyal, Emeritus Professor, Indira Gandhi Institute of Development Research, Mumbai, India; and Member, Monetary Policy Committee of Reserve Bank of India

This volume of 32 papers in macroeconomics, international economics, and international finance is intended as a tribute to the eminent econometrician , Prof B Kamaiah. Post-graduate students and researchers will find much valuable literature in the volume, which is a fitting tribute to Prof Kamaiah. The editors and authors deserve rich compliments.

- Prof. K L Krishna, Former Director, Delhi School of Economics, New Delhi, India

I am so happy to hear that Dr. Kamaiah's colleagues and ex-students are bringing out a special volume of articles in his honor. Nothing can be more appropriate. Dr. Kamaiah, being a man of tremendous publications, deserves this tribute. I wish all the luck and success to the new book.

- Prof. Kishore Kulkarni, Distinguished Professor of Economics, Metropolitan State University of Denver, USA

Indian Economics: Tragedy of a Forsaken Legacy

This paper purports to bring out in a brief but coherent fashion the fundamental contributions to economic theory and policy made by Indian thinkers in the late 19th and early 20 th century. We divide this epoch into three distinct phases viz. the pioneering, the nationalist and the modern. We then assess these contributions against the background of two developments in economic theory viz. the unity of science principle and the ascendancy of neoclassical thought. We conclude with an analysis of how this rich legacy was abandoned and argue for its reinstatement in thinking about contemporary Indian economic issues.

Dilip M. Nachane

Macroeconomics

A New Keynesian AD-AS Model for India, Incorporating the Effect of Covid-19 Pandemic

This chapter is an empirical attempt to model Indian economy at an aggregate level using annual samples from 1980–81 through 2020–21. Major theoretical premise of the chapter follows the New Keynesian AD-AS framework with backward-looking inflation expectations. Aggregate demand is captured via its components, namely private consumption, private investment, exports and imports. Together, the New Keynesian Phillips curve and neo-classical production function represents aggregate supply. The study also measures the impact of Covid-19 on the Indian economy through the components of aggregate demand and aggregate supply. As expected, the impact of the pandemic is negative, with a sharper decline in aggregate supply when compared to aggregate demand during FY 2019–20 and FY 2020–21. Turing to policy options, fiscal stimulus via capital formation is found to be more effective than higher government consumption expenditure or expansionary monetary policy by maintaining lower interest rates.

Naoyuki Yoshino, K. U. Gopakumar, Rajendra N. Paramanik, Farhad Taghizadeh-Hesary, Ma. Laarni Revilla, K. E. Seetha Ram
The Global Financial Crisis and Discontent in Macroeconomics: A Revisit by a Pedestrian Keynesian

This essay attempts to revisit the global financial crisis of 2008 and the resulting discontent in macroeconomics by examining factors like financial innovations, the deep seated macroeconomic imbalances between saving and investment in the U.S along with the Keynesian and Marxian perspectives which focus on the consumption paradox, deepening inequality, and the role of speculation in the disconnect between real and financial economy, which we prefer to label as “Pedestrian Keynesianism”. It is argued that the prime villain of the piece is financial innovations-rationalized and legitimized by anti Keynesian, market based, neo liberal financial models. All these are the outcome of the neglect of Keynes’ insightful economics and treating it as a fairy tale by anti Keynesians. While integrating the literature and concluding, a reference is made to Paul Samuelson, basically a Keynesian in sprit, who also lived in the world of derivative economics, being one of its pioneers.

D. Sambandhan
Fiscal Stimulus and the Ghost of Keynes: An Evolutionary Chronicle

The concept of the desirability of government expenditure has undergone roller-coaster locomotion over the years. This paper provides a longitudinal map of this evolutionary journey. The traditional skepticism against any role of government in classical economics has been seriously questioned and effectively done away with the advent of Keynesian macroeconomics during the Great Depression. This was epitomized in the US President Roosevelt’s New Deal during the 1930s. While the notion of a fiscal stimulus was in vogue during the 1940s through the 1960s, with spiraling inflation, the efficacy of fiscal stimulus came to be questioned, and slowly the intellectual tradition of austerity was reborn. Theoretically, this got a fillip initially from Milton Friedman and later by the rational expectationists like Robert Lucas. While the birth of the new Keynesians since the 1980s swung the austerity pendulum away from a hands-off policy of the government, the absence of any significant recession in the advanced world during the 1990s, and first few years of the new millennium gave credence toward a policy of fiscal minimalism and associated austerity. Meanwhile, in the policy space, Reagan-Thatcher policy experiments of privatization and supply-side economics during the 1980s effectively implemented such orthodoxy in both sides of the Atlantic. The global financial crisis of 2008–2009 changed all that, and a serious debate on the issue of “austerity versus stimulus” took place in the context of handling the fall-out of the recession. The recent COVID-19 pandemic, too, provided continuity to this intellectual debate.

Partha Ray, Parthapratim Pal
Assessing the Credibility of Inflation-Targeting Central Banks

This paper creates an asymmetric credibility indicator to measure the credibility of inflation-targeting central banks. The proposed indicator is computed for a sample of eight representative central banks using the inflation expectations survey data of professional forecasters and observed inflation data. The computed indicators are then used in the panel models to explore the credibility effect for central banks of emerging and advanced economies. The finding suggests that the presence of credibility makes significant changes in the constituents of inflation expectations. It makes the elements of backward-looking expectations insignificant and considerably increases the relative weight of the inflation target in the expectations formation. Further, the findings show that despite positive inflation shock in the global financial crisis, the inflation expectations were found well anchored. These findings have important policy implications for the conduct of monetary policy that credible inflation-targeting central banks can anchor forecasters’ inflation expectations in the crisis period such as COVID-19 crisis.

Motilal Bicchal
Monetary Policy Accommodation and Banking Risk: An Indian Perspective

In the aftermath of the global financial crisis of 2007, numerous research studies have been undertaken to analyse inter alia the severity of its impact and to examine the role of various factors leading to the crisis. Many such studies exposed weaknesses of the then prevailing banking regulatory framework and narrow focus of the monetary policy. It was observed that extensive financial engineering and regulatory arbitrage led to underestimating actual systemic risk in the banking sector. Several studies flagged monetary accommodation for a protracted period in the USA and many other advanced economies exacerbating banking risk, as the low-interest rate environment moderated the risk perception on the one hand, as also led to search for high returns in risky lending, on the other. In this backdrop, the present study attempted to assess if similar monetary policy accommodation during 2002–11 in India could have any role in increasing banking risk in India, which was reflected in the incidence of high bank NPAs since early 2010s. To examine this issue, we have used a dynamic panel data analysis based on data of 41 commercial banks for the period 2004–05 to 2019–20. In the econometric model, the variation in bank risk was explained by using standard macroeconomic and bank-specific variables, and the monetary policy stance was added to the list as an additional explanatory variable. The estimated results revealed that although the coefficient of monetary policy stance was negative suggesting monetary policy accommodation having potential to raising banking risk in India, but the coefficient was not statistically significant. Thus, the present study could not find evidence of monetary policy accommodation impacting banking risk in India. This may be due to effective coordination of monetary policy and banking regulatory policies, undertaken by the RBI. Important policy implication in the above context is to continue and consolidate judicious use of appropriate banking regulatory instruments in synchronization with the accommodative monetary policy, so that the adverse consequences of the latter to raise banking risk can be suitably neutralized.

Amaresh Samantaraya, Mausumi Mohanty
Understanding the Performance of Core Inflation in India

The present study aims to empirically understand the behaviour of core inflation in India. A measure of core inflation is developed, and it is empirically estimated for the time period of January 2012–December 2019 based on consumer price index data. Then, we study the response of core inflation with respect to certain macroeconomic variables. Autoregressive distributed lag model, and bound test approach is used for this analysis. It is found that cross-section price distribution in India is positively skewed. Therefore, core inflation series constructed through statistical approach based on asymmetric trimmed mean is considered to be appropriate. The findings of the study suggest superior performance of such measures of core inflation in describing the underlying inflation trend when compared with conventional exclusion-based approaches. Additionally, we find that—both in the short as well as in the long run—core inflation significantly responds to macroeconomic variables.

Naresh Kumar Sharma, Priyanka Sahu
Do Absorptive Capacities Matter for FPI-Growth Nexus? Evidence from Cross-Country Analysis

Since the 1990s, there has been an increase in the volume of Foreign Portfolio Investments (FPI) flowing to developing economies. Theoretically, FPI inflows are supposed to promote economic growth by lowering cost of capital, increasing investment, diversifying risk and developing the financial sector. However, FPI—being short-term investments—may lead to boom and bust cycle affecting growth and stability. In this context, we empirically examine the impact of FPI on the economic growth for 82 countries for the period 2000–2017. We try to capture the differential effects of FPI across different categories of countries and transmission channels. Results reveal a positive relationship between FPI and economic growth for all sets of developing countries, with the magnitude of benefits being the highest for emerging economies. Moreover, domestic factors such as human capital, financial sector and external debt are found to influence the impact of FPI on growth. Therefore, there is a need to push for pro-FPI policies and develop the absorptive capacities of developing countries to promote and sustain their economic growth.

Pravakar Sahoo, Ranjan Kumar Dash, Yoon Jung Choi
Do Institutional Quality and Trade Openness Influence Economic Growth? An Empirical Evidence from India

The study empirically examines the impact of trade openness and institutional quality on economic growth in India for the period 1990–2019. The study uses export plus imports as a ratio of GDP and composite governance indicators to measure trade openness and institutional quality, respectively. GDP per capita is used as the proxy for economic growth along with financial development, domestic capital, exchange rate, and inflation as other conventional determinants of economic growth. Autoregressive distributed lag (ARDL) co-integration approach along with the first-generation unit root tests is used in the present study to test empirical relationships. The results reveal that both trade openness and institutional quality exert a significant and positive impact on economic growth in both the long and short runs. Further, the interaction of trade openness and institutional quality is shown to have a significant impact on economic growth as well. The estimates also confirm that domestic capital and financial development have a significant positive influence on the economic growth of the country. The results further indicate that the exchange rate has a significant negative impact on economic growth in both long run and short run.

Arun Kumar Giri, Geetilaxmi Mohapatra
Corruption and Economic Growth: Empirical Evidence from BRICS Nations

The present study seeks to examine the impact of corruption, political stability, and trade openness on economic growth in BRICS during the period 2002–2018. It has been shown that political stability and trade openness appear to improve economic growth when the Augmented Solow Model is used as a theoretical framework and the Panel Autoregressive Distributed Lag Model (ARDL) is used as an empirical model. However, the inverted U-shaped relationship between corruption and economic growth is validated as corruption increases economic growth in the long run to a certain level. After that, it downbeats economic growth. This finding of the paper provides new insight into the relationship between corruption and economic growth. Finally, this study provided policy recommendations for reducing corruption and accelerating economic growth in the BRICS countries.

Ashmita Kesar, Pabitra Kumar Jena
Changing Contours of Union–State Relations

The Union–State relationships in India have evolved over time in the framework of severely unbalanced power distribution. An important fallout of the skewed distribution of power structure is the weak bargaining power of the states. This is reflected in the restrictions placed on the Finance Commissions through the terms of reference and proliferation of a parallel channel of transfers for central schemes. The contradictions in Centre–State relationships have come to the fore during the COVID-19 pandemic. The States, being closer to the people, have had to fight the pandemic with drained resources. In this environment, putting conditions on the States to enable additional borrowing, abrogation of the agreement to pay compensation for the loss of revenue from GST has adversely impacted on the confidence and trust between the Centre and States and does not bode well for the future of the Centre–State cooperation in policy matters. All these point to the urgent need to have an institutional mechanism for intergovernmental bargaining and conflict resolution.

M. Govinda Rao
Disinvestment and Privatization of Central Public Sector Enterprises in India: Need and Progress

The paper discusses the concept of disinvestment and privatization of the central non-departmental public sector enterprises (CPSE) and provides historical background of the divestment program of the Central Government in India. Its achievements and problems in raising additional resources to reduce fiscal stress since the beginning of the economic policy reforms in 1991 are briefly reviewed by considering four distinct phases: a. 1991–2004; b. 2004–2014; c. 2014–2019; and d. 2019–2024. Over these four phases, the divestment proceeds have been accelerating with the ones during the third phase being more than 2.5 times during the second phase. For the fourth phase, five Cs in India—CBI, CBDT, CVC, CAG, and Courts with significant presence of bureaucracy can create effective hurdles as they have done in the past to achieve targets of the divestment program. The paper concludes by pointing out the probable future efficiency gains since it is far easier in India for private to private transfer than for public to private transfer.

Archana R. Dholakia, Ravindra H. Dholakia
Does FDI Induce Knowledge Spillovers? Evidence from Indian Pharmaceutical Industry

The study examines knowledge spillovers from multinational firms in the pharmaceutical industry in India. Specifically, we examine if FDI catalyses diffusion of knowledge transfer from multinational firms’ R&D activities during 2000–01 to 2019–20 and four sub-periods of five years each. The empirical evidence suggests that multinational firms do not have an impact on the output of domestic firms in the first two sub-periods. However, generate positive knowledge spillovers in the last two sub-periods, increasing the output of domestic firms. FDI flows in the pharmaceutical sector increased mainly in the last two sub-periods due to policy changes and more relaxed FDI norms. The study finds that the competition effect exists and distinguishes domestic firms. Firms not investing in R&D face enhanced competition from firms investing in R&D activities.

Ramesh Jangili, N. R. V. V. M. K. Rajendra Kumar, N. Srinivasa Rao
India’s Service Sector Exports: Trends, Challenges and Policy Road Map

The present study is an attempt to understand the behavior of India’s services exports. To achieve this objective, the study underscores India’s potential sectors in services and identifies the key drivers of services exports. It utilizes the trend analysis for aggregate as well as disaggregate-level analysis across sectors and modes of services. For the identification of potential sectors, it uses the intra-industry trade analysis and also maps India’s service exports to that of the world service exports. A linear regression analysis is carried out to identify the key drivers of services exports. The trend analysis observes that India’s service exports are highly concentrated and not in consonance with world exports, there is much need for its diversification. The empirical estimation for services exports drivers reveals that development of financial system, improved growth prospects along with higher educational attainments, controlling exchange rate depreciation and aligning the economic structure toward industrial activities had significant positive impact on services exports of India. Finally, the study evaluates the scope of services exports for major sectors with focus on key challenges and policy recommendations.

Geethanjali Nataraj, Ashwani Bishnoi
Revisiting Literature on Trade Facilitation (TF) in the Context of COVID-19 and South Asia

The ongoing COVID-19 pandemic has adversely affected GDP growth, trade, foreign direct investment (FDI), government revenue, level of poverty, and inequality all over the world, including the South Asia region. Since the existing studies confirm the positive role of trade facilitation in increasing GDP growth, trade, welfare, FDI, government revenue, and reducing poverty and inequality, the significance of trade facilitation has intensified manifold in recent times. Against such backdrop, the present study summarizes the literature available on trade facilitation in the context of South Asia and finds that there is still a lack of evidence associating trade facilitation with other economic outcomes, namely FDI, government revenue, value chain connectivity, inequality, and poverty, as evident in the context of other regions and the world. The study further identifies the avenues for future research on trade facilitation in the context of South Asia that have remained unexplored yet. These future studies become more relevant during the time of the pandemic, as they would provide evidence to South Asian countries’ policymakers and governments in the favor of improving trade facilitation measures for reducing the adverse effects of COVID-19 on their economies.

Mamta Kumari, Nalin Bharti
Trade, Unemployment and Inequality in Product Variety Models—An Analytical Survey

There have been a significant body of theoretical and empirical work done on the effects of trade on employment and wage inequality. However, a close study of the extant literature shows that most of the work has been done within the aegis of factor-biased and sector-biased effects of factor returns due to trade. Specific factor market characteristics of the countries and their interaction owing to their trade linkages have not been explicitly studied especially in a trade model with product variety. In this work, apart from extensively discussing the literature on each of these aspects, we trace out briefly the impact of trade, entrepreneurial finance and presence of a fixed minimum wage policy on wage inequality in a one-sector Krugman-type model.

Sugata Marjit, Meghna Dutta
Trade Balance and Need of National Reserves in Face with Aging Population

This chapter analyses the impacts of various policies on household consumption in face with unexpected longevity. An overlapping generational model with three sectors: household, production sector, and government, are constructed. This paper shows if the population is aging and unexpected longevity will keep on rising, taxing the young to support the old population, consumption will significantly decrease. If the countries have accumulated national reserve, either comes from the current account surplus or the national savings surplus, then the welfare of young and old generations will be improved significantly compared to the case of tax finance. All the existing models assuming constant population growth without unexpected longevity show that current account balance is important. However, many developing countries such as India, Indonesia, Thailand, and Vietnam are facing an aging population in the future. In those cases of ageing countries with unexpected longevity, national savings either comes from current account surplus or national savings surplus, are needed in order to improve the welfare of society. Secondly, if the population is young and a high population growth rate is expected, the countries can have a slight trade deficit which can be compensated for in the future. Thirdly, the reserve is not necessarily needed forever. The RES can be kept temporarily when the elderly can postpone their retirement age being paid by productivity-based wage rate. If the retirement age can be postponed, the old people can keep on working. In this model, everybody will become the working population, which reduces the tax burden of the working population and lead to higher consumption of young people. The old people will not rely on social security but their wage rate by keep on working in the society. Old people can also consume more. In that context, the total welfare of the economy will be higher. This chapter has an important implication to emerging economies such as India, Vietnam, Thailand, and Indonesia. They should change their retirement policy to make people work even in old age being paid by productivity-based wage rate rather than rely on seniority-based wage rate system. Accumulation of reserves, while the population is young, will make the welfare of the countries higher even facing the future aging population.

Naoyuki Yoshino, Trang T. Le
An Assessment of India’s Current Account Sustainability and Adjustment: A Nonlinear Framework

We examine the nature of adjustment of the current account for India using quarterly data from 1996Q2 to 2019Q4. We find evidence of three types of nonlinearities—structural break, sign and size nonlinearity. Using a host of nonlinear unit root tests, we demonstrate that the ratio of current account to GDP for India is stationary. Nonlinearity and stationarity together imply that India’s current account is sustainable over the sample period and exhibits asymmetric adjustment. This may explain why the current account behaviour is characterized by persistent yet small deficits. We also estimate logistic smooth transition autoregressive and vector autoregressive models to examine the dynamics of the current account and the influence of other explanatory variables such as the exchange rate and interest rate on the current account.

Archana Kulkarni
Current Account Balances and Non-financial Corporate Savings—A Cross-Country Perspective

As non-financial corporate sector savings tend to increase globally, its effect on the current account balance assumes particular significance for macrofinancial stability. This study investigates the relationship between current account balance and (non-financial) corporate savings for a panel of developed and developing countries. Using a system GMM model, we find that average current account increases by 0.32% when non-financial corporate savings increase by 1%. Our results are robust to controlling for household sector and government net savings. While the nature of relationship varies across developed versus developing economies, we find that outward flow of FDI and net investment income are plausible channels through which the non-financial corporate savings impact a country’s current account, where corporate savings are affected more by their own income effect compared to a relative price effect. A country’s demographic characteristics and currency strength are important determinants driving this relationship.

Purna Banerjee, Sonalika Sinha
Evolution of Debt and Deficit in BRICS Countries: Covid-19 Shock and Post-Covid Prospects

In this paper, we have analysed the evolution of government debt relative to GDP in the BRICS economies with a view to highlighting the impact of Covid and the related surges in fiscal deficits as part of fiscal stimulus on their sustainability profiles. We have highlighted the roles played by the contribution made by primary balance and the excess of growth over interest rates in the evolution of the debt-GDP ratios of these countries. We have also estimated sustainability thresholds for India and South Africa using a threshold estimation procedure. All BRICS countries except China have explicit fiscal responsibility legislations. However, the relevant norms have been thrown out of gear due to the impact of the Covid. In fact, India, Brazil and South Africa had sustainability issues even prior to the onset of Covid. China may also face sustainability issues in the post-Covid years. Russia is the only country amongst the BRICS countries which may be spared of these issues. Brazil, India and South Africa may need a persistent effort to reduce primary deficits and uplift growth rates after their economies normalize once the Covid-related issues have been overcome.

D. K. Srivastava, Muralikrishna Bharadwaj, Tarrung Kapur, Ragini Trehan
Are Bank Revenue Diversification Strategies Paying off for India?

Banks worldwide are strategically diversifying their revenues to stabilize the earning profile and improve profitability. We revisit this hypothesis in the Indian context using a longer time series of bank performance data from 1999 to 2020, which coincides with the onset of 2nd financial reforms in the country. We observe that the increasing share of non-interest income in the total income of Indian banks reflects the adoption of revenue diversification strategies. We assessed the impact of non-interest income on profitability and risk of banks and find evidence that profitability and risk of the banks are positively associated with the non-interest income with varied trends for individual bank groups. We also investigated the impact of components of non-interest income, viz. fee, trading and miscellaneous income on bank profitability and risk, and observed that the impact is varied across banking groups. Overall, our findings suggest that the benefits from revenue diversification strategies for banks in India is positive, but it is dependent on bank ownership type and the components of the non-interest income. Our results are robust and provide measures of revenue diversification and its impact on profitability and risk.

Nagaraju Thota, Pranesh Bhargava, A. C. V. Subrahmanyam
The Way to Finance Needed Infrastructure Investments in Asian by Inviting Private Investors

Due to Covid-19, many governments spent huge amounts of money on medical care, health, sanitation and vaccination. Fiscal budget for infrastructure investment is squeezed. However, infrastructure is an engine of growth in many Asian countries. This chapter will address how to bring private sector funds into infrastructure investment. This would be achieved by using a floating-interest-rate infrastructure bond. In this, the interest of a government bond is paid to investors during the period of construction and the early period of operation. Traditionally, infrastructure investors relied on user charges for their revenues. Users of infrastructure prefer a lower price, whereas investors and operators in infrastructure prefer a higher price, which causes conflicts between them. Electricity, water supply, sanitation, etc. are necessary goods. In order for them to properly be used by low-income groups, the prices of these necessities must be kept low. This is one of the reasons why public–private partnership (PPP) did not work well in Asia. It is important to find other sources of revenue while keeping user charges low. Major aim of infrastructure is to bring businesses to the region and establish connectivity between rural and urban regions. This will enable farmers and fishermen to sell their fresh products in a shorter span of time. Income disparities will be mitigated as new businesses can hire people in the region. New restaurants can be started along roads, railways and expressways. Economic activities and spill-over tax revenues will increase. Earlier all the spill-over tax revenues were collected and were not returned to investors and operators. If these spill-over tax revenues were partly, say 50%, returned to investors and operators of infrastructure, the revenues would come in every year without raising user charges. An increase in rate of return will attract private investors and maintenance costs of infrastructure can be covered. The regional infrastructure floating bond market will accelerate cross-border investment into infrastructure projects. The chapter will also address how to smoothen land acquisition by the land trust mechanism in Asian region which aids in the prevention of corruption associated with land acquisition. This chapter will address global taxation adjusted by green efforts, which will encourage environmental friendly infrastructure investment in Asia.

Naoyuki Yoshino, Saloni Lakhia

Finance

Do Developing Countries Still Suffer from the Foreign Exchange Constraint? An Empirical Study for 1990–2014

Globalization can potentially ease or firm up the foreign exchange constraint of a country. Considering a sample of 42 less developed countries and fixing an approximate date of globalization in 1991, we show that, at the aggregate level, the constraint has relaxed for them since the 1990s. After fixing the approximate dates of globalization for each country from the available literature and replicating the analysis at the country level, we found mixed results. Though the results are mixed, a general conclusion can be derived from the results: The foreign exchange constraint has relaxed due to globalization in upper-middle and lower-middle-income developing countries, while the opposite is true for low-income countries. Balance-of-payment accounting statistics show interesting correspondences. Merchandise exports and Foreign Direct Investment (FDI) tend to have a high and positive correspondence with relaxing the burden of the constraint while Foreign Portfolio Investment (FPI) and efforts toward reduction of imports have no correspondence. Policy insights derived from the analysis suggest export diversification is important for improving current account balance.

Ranajoy Bhattacharyya, Riddhi Chatterjee, Gouranga G. Das
Estimation of Critical Level of Exchange Rate to Manage Corporate Default and NPAs

The paper analyzes the impact of exchange rate volatility on profit and loss accounts and balance sheets of listed corporate firms in India. We estimate the critical exchange rate for NSE-listed firms from various industries in India. Using the data on bank NPAs in India, the paper also examines the link between exchange rate volatility, corporate default, and bank NPAs. The results suggest that the exchange rate in the range of Rs. 50/$to Rs. 60 /$ is a safe rate for corporate firms and even for banks to maintain a lower level of NPAs. Any movement outside this critical exchange rate band is likely to trigger defaults, though there is an asymmetry, viz. depreciation of the rupee has more serious consequences as compared to appreciations.

Rajas Parchure, Lalitagauri Kulkarni, Kalluru Siva Reddy
Is There an End to the Currency Crisis in Turkey?: An Empirical Investigation

Our study investigates the currency crisis in Turkey for the period 2001Q1–2020Q4. In this paper, we construct an Exchange Market Pressure Index to identify the currency crisis and/or stress periods. After identifying the crisis periods, we use the binary logit model to find the determinants of the crisis in Turkey. The following periods have been identified as crisis periods: 2001Q1, 2001Q2, 2001Q3, 2001Q4, 2018Q3, 2020Q3 and 2020Q4. Our results suggest that rate, current account balance, openness, exports and inflation act as the determinants of the currency crisis in Turkey.

Balaga Mohana Rao, Suvvari Ananda Rao
Effects of Exchange Rate Fluctuations on Investment: Firm-Level Evidences from India

This paper investigates how exchange rate fluctuations affect the investment decisions of firms in India. For this, we have estimated a dynamic model using panel data from an aggregate sample of 863 Indian firms. Overall results are consistent with the findings of existing theoretical and empirical literature showing that rupee depreciation has a positive effect on investment through the export channel and negative effect through import channel. The results also reveal that impact of exchange rate changes on investment depends on the competitive structure of firms as the investment of firms with lower monopoly power is more responsive to the exchange rate fluctuations than the firms with higher monopoly power.

Anver C. Sadath, Rajesh H. Acharya
Official Interventions in the Foreign Exchange Market: Implications for Exchange Rate and Its Volatility

The official interventions undertaken by monetary authorities in the foreign exchange markets are largely aimed at minimizing the volatility of exchange rates. However, these interventions as documented in literature are more of the type of ‘secret interventions’ which are likely to create ambiguity in the market and trigger volatility. We examine this issue using monthly data from a sample of nine countries for the period 1997:01 to 2019:12. The empirical evidence obtained from GARCH estimates of a dynamic panel model with conditional covariance as proposed by Cermeño and Grier (Contributions to economic analysis. Elsevier, pp. 259–277, 2006) reveals that official intervention is counterproductive, i.e. such interventions seem to trigger the volatility of exchange rates rather than minimizing them.

Hersch Sahay, M. Ramachandran
Determinants of Bitcoin Price: Evidence from Asymmetrical Analysis

Using technical determinants (mining difficulty), macroeconomic and financial determinants (FED rate, S&P 500 and Altcoins) as well as the investor attention (Google Search), we model their possible short-run and long-run asymmetric impacts on the Bitcoin prices. Monthly data ranging from May 2013 to Dec 2019 is employed for the modelling purposes. In order to capture the possible asymmetry, nonlinear auto-regressive distributed lag model (NARDL) is employed for the purpose of estimation. The results reveal that FED rate and mining difficulty has a long-run positive impact on Bitcoin prices, whereas Altcoins are found to have long-run negative impact. Further, short-run negative asymmetry was found for Google Search, S&P 500 and Altcoins. This study conclusively proves that the potential determinants of Bitcoin prices have both long- and short-run asymmetric impact on Bitcoin prices.

Anoop S. Kumar, Taufeeq Ajaz
Financialization of Commodity Market in India: Implications for Intragroup Investing

This study examines the intragroup co-movement pattern among the daily returns of base metals, precious metals and energy commodity futures in the Indian commodity market using the dynamic conditional correlation method. It intends to verify, whether commodity futures in India are financialized enough to move in unison despite the differences in individual factors like demand, supply, production process and usage. The results of the study confirm that returns of base metals futures and precious metals futures exhibit higher unison than energy futures, thus marking energy futures most favourable for potential diversification benefits. The measure of hedging effectiveness align with the correlation estimates. Additionally, we also conduct a demand–supply analysis of the underlying physical commodities and find that higher co-movements are observed within metal futures and energy futures when their spot market prices are lower often occurring due to low demand/high inventories and vice versa.

Long Memory and Correlation Structures of Select Stock Returns Using Novel Wavelet and Fractal Connectivity Networks

Despite several attempts in applied econometrics and time series literature to identify the common channels contributing to fractal structures and long memory in multivariate financial time series, we propose a wavelet-based fractal connectivity analysis, which is the first application in economics and financial studies, enabling one to successfully segregate markets into fractally similar or diverse groups and find that developed markets have similar fractal structures. Similarly, stock returns of emerging markets exhibiting long memory tend to follow similar fractal structures. Furthermore, network analyses of fractal connectivity support our findings on market efficiency which has theoretical roots in both fractal and adaptive market hypothesis.

Avishek Bhandari, Ata Assaf, Rajendra N. Paramanik
Understanding the Impact of COVID-19 on Financial Markets: Animal Spirits or Black Swan?

This chapter investigates how the financial markets react to the coronavirus outbreak by utilizing an event-study approach. We consider several news-based positive and negative COVID-19 events and their impact on emerging vs. developed markets and major asset classes. We examine the impact of COVID-19 events on the implied volatility of the global financial system, which is strongly observed in March 2020. Even during black swan events, we observe the asymmetric impact of coronavirus outbreaks across assets and markets. The response of black swan events generates a pronounced investor reaction. We also observe the role of ‘Animal Spirits’ through ‘Narrow Framing’ as investors seem to consider the pandemic as short-term shocks.

Wasim Ahmad, Smarth Gupta, Shirin Rais
FII Trading Pressure and Stock Volatility in India

Effect of trading volume on volatility has been established by research in large number of asset classes. Research in effect of trader type has revealed mixed evidence. Foreign Institutional Investors (FII) comprise a large trader group in Indian Equities. This study uses FII trade volume data for individual stocks to explore its effect on the volatility of these stocks. Trade volume has been used as an exogenous regressor in the EGARCH specification of daily volatility and has been found to have a significant effect in a large number of stocks. Our research indicates that FII purchases (sales) have a volatility lowering (heightening) effect in individual stocks.

Anshul Jain, P. C. Biswal
Impact of US UMP on Indian Stock Market

This paper looks at the impact of US quantitative easing (QE) on the Indian benchmark stock market index, the Nifty. Using data from September 2008 to June 2019 within an autoregressive distributed lag (ARDL) framework, we find that there is a long-term relationship between the QE, Nifty and other macroeconomic variables. A 10 percentage point increase in QE leads to a 2.1% increase in Nifty returns. From the counter factual analysis it is noted that Nifty would have been lower if there was no QE. The dependence of the Nifty on FII flows and the vagaries of FII flows on the unconventional monetary policies of the USA render the Indian stock market vulnerable.

Moumita Paul, Kalluru Siva Reddy
Title
Studies in International Economics and Finance
Editors
Prof. Naoyuki Yoshino
Rajendra N. Paramanik
Assist. Prof. Anoop S. Kumar