Policy Errors and Business Cycle Fluctuations: Evidence from an Emerging Economy

In the immediate aftermath of the global financial crisis, the monetary policy in India became accommodative as in other major economies, but the policy subsequently turned highly contractionary despite falling inflation, which we characterize as policy errors. Government expenditure also had similar pattern. This paper therefore estimates a medium scale New Keynesian model (with earnings and assets based collateral constraint) to explore the impact of such policy errors on Indian business cycles, capturing the prevailing narrative on both monetary and fiscal policies along with the actual inflation scenario. Our smoothed estimates of mark-up, productivity, interest rate and government expenditure shocks mimic the actual transition of the economy, with both policy shocks moving together in a similar pattern in the post crisis period. We find that the interest rate policy was highly contractionary during 2013-16 which led to significantly lower output. We rationalize that if supply side shocks (adverse productivity or mark-up) dominate, such policy errors tend to occur, suggesting that policy makers need to pay attention to the sources of inflation in a developing economy while setting demand-management policies. Given the current pandemic being more of a adverse supply shock, similar policy errors are likely to occur if interest rate responds to this type of inflationary shocks.  

Are Autocracies Bad for the Environment? Global Evidence from Two Centuries of Data

Reducing  carbon-dioxide emissions is crucial to subside the danger posed by climate change. Ex-ante there are reasons in favor and against democracies in achieving these desired reductions. Using data from 150 countries, we  estimate the  marginal emission intensity i.e.  the change in per-capita carbon-dioxide emission  for a unit change in per-capita income across autocracies and democracies. We use regional waves of democratisation and mean per-capita income of other countries in the region as instruments for democracy and per capita income respectively. Using these instruments, we  obtain the causal estimate of the difference in marginal emission intensity and confirm that democracies indeed emit less per-capita carbon-dioxide  for a unit increase in per-capita income compared to autocracies. Our results suggest that these benefits of democracies have occurred in recent decades following the surge in public concern for the climate change and intergovernmental initiatives to reduce emissions. There is also evidence to suggest that strengthening rule enforcement and improving access to justice can be critical in decreasing carbon-dioxide emissions.