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This study conducts policy-based macro stress testing of the Indian banking sector and also assesses its resilience towards compliance with BASEL norms with the aid of an empirical macro-financial model. It uses scenario analysis and quantitative techniques to capture the impact of macroeconomic stress on the stability of the Indian banks by evaluating financial soundness indicators (credit quality, quantity and quality of capital adequacy). The scenarios are generated through policy-based shocks vis-a-vis other external shocks. The results from the estimation of the model indicate a cointegrating relationship between credit quality and key macroeconomic variables including output growth rate, interest rate, money growth rate and exchange rate. The results of the scenario analysis reveal that the Indian banking sector remains largely sound in terms of total regulatory capital adequacy ratio as per current BASEL II and even BASEL III requirement. The results also show that expansionary monetary policy impacts credit quality and capital adequacy in a positive and significant manner via its effect on the economy’s growth rate.

This paper investigates contagion across stock and currency markets of China, Eurozone, India, Japan and US during global financial crisis and Eurozone crisis. The crisis periods are selected using Markov-switching models for US and Eurozone markets. We, then, utilize the DCC-GARCH model to estimate conditional correlation among the assets and test for contagion/flight to quality effects during the crises. The results show significant contagion as well as flight to quality effects both across and within asset classes. We examine the impact of financial stress index on the correlation across markets and find that portfolio diversification benefits for equity markets may be non-existent.

Summary This paper analyzes the macroeconomic determinants of portfolio flows to India and finds that lower exchange rate volatility and greater risk diversification opportunities are conducive to portfolio flows. However, higher equity returns of other emerging markets discourage these flows. Other conventional determinants of portfolio flows are domestic equity performance, exchange rate, interest rate differential and domestic output growth. An analysis of disaggregated portfolio flows shows that determinants of FIIs are similar to aggregate portfolio flows, while ADR/GDRs are significantly influenced only by domestic equity returns, exchange rate, domestic output growth, and foreign output growth.

This paper examines the determinants of interest rates in India in the post-reform period in the context of a model that takes into account both domestic and external factors. The short- and long-run behavior of interest rates (commercial paper rate, 3-month Treasury bill rate, 12-month Treasury bill rate) is studied. The empirical results are robust across interest rates and indicate the existence of a cointegrating relationship between real interest rates, real government expenditure, real money supply, foreign interest rates and the forward premium. The estimations also show that movements in interest rates are Granger caused by both domestic and external factors.

The failure of economic forecasters to predict the most recent US recession has renewed interest in the idea of supplementing model-based forecasts with information from other, more qualitative, indicators. This paper tests whether one such variable, the consumer confidence index, could have improved these forecasts; and whether improvements are greatest for forecasts generated by econometric models with little judgmental adjustment. We find that consumer confidence would have been helpful in predicting the 1991 recession. But the result does not generalize to other years, and appears to reflect the special nature of the recession rather than a persistent weakness in forecasting technique.

A prominent feature of U.S. monetary data is the nonstationarity of M1 velocity. One aspect of the empirical failure of the dynamic general equilibrium monetary models of money demand is the inability of these models to reproduce a nonstationary income velocity. The Euler's equations of these models reflect that equilibrium income velocity and nominal interest rates are both stationary, which is inconsistent with the stylized facts. Using a specific parametric form of a cash-in-advance model a la Lucas and Stokey (1987) we argue that the failure to reproduce a nonstationary income velocity may be due to the assumption of a homogeneous utility function involving cash and credit goods. Once this homogeneity restriction is relaxed, the equilibrium income velocity becomes nonstationary. A long-run nonlinear relationship between velocity, nominal interest rates and real output then emerges, which is consistent overall with the data.

This paper explores the technology spillover effect of foreign direct investment (FDI) in Indian manufacturing industries across different clusters in India. To measure the spillover effect to domestic firms in a particular cluster, a model is used that combines an innovative production function with a conventional one. The empirical findings reveal significant variations across clusters with regard to spillovers. While some clusters benefit from cluster-specific foreign presence and technology stock, a more commonly observed pattern is that domestic firms in a cluster gain from the presence of foreign firms in other clusters of the region and region-specific technology stock.

The paper attempts to analyze the spillover effect of Foreign Direct Investment (FDI) across Indian manufacturing industries. Foreign presence by way of FDI brings new channels of technology spillover to the domestic industrial firms in the form of enhanced efficiency and diffusion of knowledge in the long-run. By carrying out Pedroni cointegration tests, the analysis tries to provide a long-run relationship between endogenous variables and explanatory variables, pertaining to technology spillovers across Indian manufacturing industries. We find that technology spillovers are relatively higher in industries like food products, textiles, chemicals, drugs and pharmaceuticals and non-metallic mineral products.

This article tests various hypotheses concerning the determinants of the 3-, 6-, and 9-month horizon term premia. The term premia are computed using the forecasts of the 3-month Treasury bill rate from the survey conducted by the American Statistical Association in collaboration with the National Bureau of Economic Research. We find that the term premia are influenced by the level of interest rates and cyclical factors in addition to the level of rates. They are also influenced by government economic policy.

This paper tests whether economic forecasters differentiate their products, either by making forecasts which are consistently more optimistic or pessimistic than the industry average, or by developing comparative advantages in forecasting some variables at the expense of others. Application of nonpara-metric tests to the track records of 19 U.S. forecasters shows that the first strategy is followed, but not the second. These results imply that many forecasters may have found it optimal to produce forecasts which are technically irrational.

This paper uses a survey of US economic forecasters to assess the impact of their theories and forecasting methods on the accuracy of their predictions for a number of macroeconomic variables. Forecasters who give more weight to Keynesian ideology and econometric modelling dominate predominantly atheoretical times series forecasters for most variables. Although Keynesianism is the most popular ideology in practice, most forecasters place more weight on judgment than on any formal modelling technique.

In this paper we estimate the natural rate of inflation for the United States. To obtain our estimate we combine macroeconomic theory and the theory of public choice. Macroeconomic theory gives us the equilibrium rate of unemployment, commonly known as the natural rate of unemployment. At this unemployment rate, the rate of inflation is indeterminate as it depends on government monetary and fiscal policy. Public choice theory supposes that, in their own self interest, politicians respond to the concerns of the voters. We quantify the public’s concerns with respect to inflation and unemployment and show that politicians will choose an equilibrium rate of inflation of approximately five or six per cent.

We combine an econometric analysis of survey data on the relative seriousness of inflation and unemployment with the median voter theorem to derive the equilibrium rate of inflation. If the natural rate of unemployment is 7 percent, then the equilibrium inflation rate is 5.4 percent.