"Capital account liberalisation in a large emerging economy: An analysis of onshore-offshore arbitrage" with Nidhi Aggarwal and Rajeswari Sengupta, IGIDR Working Paper, WP-2021-013 , 2021
Link: http://www.igidr.ac.in/pdf/publication/WP-2021-013.pdf
Summary: In this paper, we decipher the openness of India’s capital account by calculating the covered interest parity (CIP) deviations between the onshore-offshore rupee market. India is a country with an elaborate and comprehensive system of capital controls covering all kinds of international financial transactions. This has led to a thriving offshore rupee market of non-deliverable currency forward (NDF) contracts. We analyse more than 20 years (1999-2020) of daily return differentials in the NDF market vis-a-vis the onshore spot market, estimate structural breaks in CIP deviations and connect the sub-periods so obtained to the patterns of changes in de-jure capital control actions announced by the Indian authorities. We also estimate no-arbitrage bands around the CIP using a Self-Exciting Threshold Autoregressive (SETAR) model. We find that on average over the duration of our sample period the capital controls broadly restrict capital outflows more than they restrict capital inflows. While over time India has become more financially integrated with the rest of the world, the process of capital account opening has not been a continuous and smooth one. This is reflected in large variations in CIP deviations across the period. In recent times the deviations have become smaller and the no-arbitrage bands that capture the transactions costs and the degree to which the capital controls are binding have become narrower.
"Changes in the Response of Fiscal Policy to Monetary Policy in the EMU" with Claire Reicher, Kiel Advanced Studies Working Paper Series, No: 464, June 2014
Summary: We study the evolution of the response of fiscal policy to monetary policy shocks in the EMU in the light of two important events: the signing of the Maastricht treaty in 1992 and the introduction of the EMU in 1999. Based on impulse responses from a panel VAR, we find that fiscal and monetary policy acted neutrally toward each other before the Maastricht Treaty; fiscal and monetary policy acted as substitutes immediately after the Maastricht Treaty; and fiscal and monetary policy acted as complements after the introduction of the EMU. These results holds for a set of 11 non-EMU countries as well, which indicates that the evolution of the fiscal response to monetary shocks within the EMU has broadly mirrored global developments. One example of such a global development is the global shift toward lower interest rates and tighter fiscal policy during the 1990s.
"Identifying SIFIs and SINFIs: New Perspectives in Measuring Systemic Risk" with Susan Thomas, Rohini Grover, Akhil Behl, Shashwat Khanna and Natasha Agarwal, 2014
Link: https://papers.ssrn.com/sol3/papers2.cfm?abstract_id=2396071
Summary: This paper analyses the systemic risk in an emerging market context, with two innovations. It uses the average of the percentile ranking of three widely used measures of systemic risk of a firm to calculate a single systemic risk index (SRI) for the firm. It then uses the SRI to identify systemically important financial institutions (SIFIs) and non-financial institutions (SINFIs) among 50 largest Indian firms, in each quarter from 2000 to 2012. The paper finds that the SRI tracks the changes in systemic risk in India during the 2008 crisis. The paper also shows that there is merit in monitoring the SRI of SINFIs, particularly when bank loan portfolios have concentrated exposures in such firms.
Dynamic Monetary and Fiscal Policy Games under Adaptive Learning
Summary: Monetary and fiscal policy games have often been modeled with the assumption of rational expectations (RE) despite the growing criticism in the literature. In this paper, we relax the RE assumption and analyse strategic monetary and fiscal policy games (Nash, Stackelberg & Cooperation) under the assumption of adaptive learning (AL) agents. The AL agents update their beliefs as new data become available, and are bounded rationally. We calibrate the policy games under both the assumptions, and compare their relative performance on different metrics. We find that AL expectations does not to converge to RE even in the long run (150 periods), rather it stays around the vicinity of the RE equilibrium. The results suggest that monetary leadership outperforms the other games on mainly three grounds: (1) the additional losses accruing to the monetary and fiscal authority under the AL assumption are lowest, (2) the percentage addition by AL to the levels of the variables, their absolute and relative volatility over and above RE are the least, (3) inflation expectations under AL is closest to RE.