Selected Working Papers and Publications
“Financial Vulnerability and Risks to Growth in Emerging Markets” (with Viral V. Acharya and Jay Surti)
National Bureau of Economic Research WP: Link
This paper introduces a new financial vulnerability index for emerging market economies by exploiting key differences in their business cycles relative to those of advanced economies. Information on the domestic price of risk, cost of dollar hedging and market-based measures of bank vulnerability combine to generate indexes significantly more effective in capturing macro-financial vulnerability and stress compared to those based on information in trade and global factors. Our index significantly augments early warning surveillance capacity, as evidenced by out-of-sample forecasting gains around a majority of turning points in GDP growth, relative to distributed lag models that are augmented with information from macro-financial indexes that are custom-built to optimize such forecasts.
“Constructing a Coincident Economic Indicator for India: How Well Does It Track GDP?” (with Saurabh Ghosh and Pankaj Kumar)
Asian Development Review: Forthcoming
In India, the first official estimate of quarterly GDP is released approximately 7-8 weeks after the end of the reference quarter. To provide an early estimate of the current quarter GDP growth, we construct Coincident Economic Indicators for India (CEIIs) using a sequentially expanding list of 6, 9 and 12 high-frequency indicators. These indicators represent various sectors, display high contemporaneous correlation with GDP, and track GDP turning points well. While CEII-6 includes domestic economic activity indicators, CEII-9 combines indicators of trade and services and CEII-12 adds financial indicators in the model. In addition to conventional economic activity indicators, we include a financial block in CEII-12 to reflect the growing influence of the financial sector on economic activity. CEIIs are estimated using a dynamic factor model which extracts a common trend underlying the high-frequency indicators. The extracted trend provides a real time assessment of the state of the economy and helps identify sectors contributing to economic fluctuations. Further, GDP nowcast using CEIIs shows considerable gains in both in-sample and out-of-sample accuracy. In particular, our GDP growth nowcast is observed to closely track the recent slowdown in the Indian economy.
“Money’s Causal Role in Exchange Rate: Do Divisia Monetary Aggregates Explain More?” (with Taniya Ghosh)
International Review of Economics and Finance: Volume 57, September 2018, pp. 402-417
We investigate the power of Divisia monetary aggregates in predicting exchange rate variations for India, Israel, Poland, the UK, and the US in the years leading up to and following the 2007–08 recession, during which the interest rates for some major economies have been stuck at or near the zero lower bound (ZLB). Consequently, the interest rate has become uninformative regarding the stance of monetary policies. As an important innovation, our research adopts the Divisia monetary aggregate as an alternative to the policy indicator variable. We apply the bootstrap Granger causality method, which is robust to the presence of non-stationarity in our data. We also apply bootstrap rolling window estimates to account for the parameter non-constancy and structural breaks in our sample. We find a strong causality from Divisia money to exchange rates and further highlight the importance of Divisia at ZLB by capturing the time-varying link between these variables.
“An SVAR Approach to Evaluation of Monetary Policy in India: Solution to the Exchange Rate Puzzles in a Small Open Economy” (with William A. Barnett and Taniya Ghosh)
Open Economies Review: Volume 27, 2016 Issue 5, pp 871–893
Following the exchange-rate paper by Kim and Roubini (J Monet Econ 45(3):561–586, 2000), we revisit the questions on monetary policy, exchange rate delayed overshooting, the inflationary puzzle, and the weak monetary transmission mechanism; but we do so for the open Indian economy. We further incorporate a superior monetary measure, the aggregation-theoretic Divisia monetary aggregate. Our paper confirms the efficacy of the Kim and Roubini (J Monet Econ 45(3):561–586, 2000) contemporaneous restriction, customized for the Indian economy, especially when compared with recursive structure, which is damaged by the price puzzle and the exchange rate puzzle. The importance of incorporating correctly measured money into the exchange rate model is illustrated, when we compare models with no-money, simple-sum monetary measures, and Divisia monetary measures. Our results are confirmed in terms of impulse response, variance decomposition analysis, and out-of sample forecasting. In addition, we do a flip-flop variance decomposition analysis, finding two important phenomena in the Indian economy: (i) the existence of a weak link between the nominal-policy variable and real-economic activity, and (ii) the use of inflation-targeting as a primary goal of the Indian monetary authority. These two main results are robust, holding across different time period, dissimilar monetary aggregates, and diverse exogenous model designs.
“India’s Bad Loan Conundrum: Recurrent Concern for Banking System Stability and the Way Forward” (with Bhanu Pratap)
International Symposia in Economic Theory and Econometrics: Banking and Finance Issues in Emerging Markets, Volume 25
In the economic literature, a crisis has been thematically defined around bank runs, failure of large financial corporations, and financial distress. Section 1 summarizes our learnings about international banking crisis, in terms of the origin and impact of such crises. This provides us an international benchmark before we delve deeper into India's banking distress, its size and trends. Section 2 focuses on the twin-balance-sheet crisis in India. On one side, corporate firms recklessly overleveraged, resulting in excess capacities and business diversification. On the other side, banks, both private and public, fell prey to excessive and procyclical credit lending and improper monitoring. Overall, too many projects were left too weakly monitored. Separately, we have focused on two subsections, first, how the financial institutions in India have overstretched their credit-disposal limit during market upturns. Second, we found absence of any theoretically grounded approaches to determine the capital-adequacy ratios (CARs) for the banks. In Section 3, we have identified the steps taken so far by the Banking regulator and the Government to resolve the crisis. Further, we critically examine the role of Korea Asset Management Corporation (KAMCO) towards a successful non-performing assets (NPAs) resolution in South Korea. Few key takeaways include, (1) establishing a public asset-management company (AMC) focused on maximization of recoveries and resolution of stressed assets, (2) well-defined governance structure for the AMC ensuring it works on market principles, shielded from political interferences, and (3) realistic asset valuation and transfer price that ensures limited downside risks for the public AMC.