Amartya Lahiri

Delaying the Inevitable: Interest Rate Defense and Balance of Payments Crises

The classical model of balance of payments crises implicitly assumes that the central bank sits passively as international reserves dwindle. In practice, however, central banks typically defend pegs aggressively by raising short‐term interest rates. This paper analyzes the feasibility and optimality of raising interest rates to delay a potential BOP crisis. Interest rate policy works through two distinct channels. By raising demand for domestic, interest‐bearing liquid assets, higher interest rates tend to delay the crisis. Higher interest rates, however, increase public debt service and imply higher future inflation, which tends to bring forward the crisis. We show that, under certain conditions, it is feasible to delay the crisis, but raising interest rates beyond a certain point may actually hasten the crisis. A similar nonmonotonic relationship emerges between welfare and the increase in interest rates. It is thus optimal to engage in some active interest rate defense but only up to a certain point. In fact, there is a whole range of interest rate increases for which it is feasible to delay the crisis but not optimal to do so.

Delaying the Inevitable: Optimal Interest Rate Policy and BOP Crises

The classical model of balance of payments crises implicitly assumes that the central bank sits passively as international reserves dwindle. In practice, however, central banks typically defend pegs aggressively by raising short-term interest rates. This paper analyzes the feasibility and optimality of raising interest rates to delay a potential BOP crisis. Interest rate policy works through two distinct channels. By raising demand for domestic, interest-bearing liquid assets, higher interest rates tend to delay the crisis. Higher interest rates, however, increase public debt service and imply higher future inflation, which tends to bring forward the crisis. We show that, under certain conditions, it is feasible to delay the crisis, but raising interest rates beyond a certain point may actually hasten the crisis. A similar non-monotonic relationship emerges between welfare and the increase in interest rates. It is thus optimal to engage in some active interest rate defense but only up to a certain point. In fact, there is a whole range of interest rate increases for which it is feasible to delay the crisis but not optimal to do so.

Castes and Labor Mobility

How have the poorest sections of society in India responded to the rapid changes in the Indian economy over the past 30 years? We examine this issue by focusing on the fortunes of Scheduled Castes and Scheduled Tribes (SC/ST) - the historically disadvantaged and underprivileged castes in India. We find that since 1983, wages of SC/STs have been converging towards non-SC/ST levels with rising education attainment accounting for over 50 percent of this wage convergence. The occupation distribution of SC/STs has also been converging toward that of non-SC/STs. This period has also been marked by a sharp convergence in intergenerational education and income mobility rates of these two groups. Moreover, SC/STs have been switching occupations and industry of employment across generations at increasing rates. We conclude that the massive structural changes in India since the 1980s have proved hugely beneficial for SC/STs who have significantly narrowed their historical economic disparities with non-SC/STs during this period. In fact, relative incomes of SC/STs have become higher than the relative incomes of Blacks and Hispanics in the USA.

Breaking the Caste Barrier: Intergenerational Mobility in India.

We contrast the intergenerational mobility rates of the historically disadvantaged scheduled castes and tribes (SC/ST) in India with the rest of the workforce in terms of their education attainment, occupation choices and wages. Using survey data from successive rounds of the National Sample Survey between 1983 and 2005, we find that intergenerational education and income mobility rates of SC/STs have converged to non-SC/ST levels during this period. Moreover, SC/STs have matched non-SC/STs in occupation mobility rates. We conclude that the last 20 years of structural changes in India have coincided with a breaking down of caste-based barriers to socioeconomic mobility.

Growth and equilibrium indeterminacy: the role of capital mobility

Summary. The paper presents a human capital driven endogenous growth model which, in general, permits a multiplicity of equilibrium balanced growth paths. It is shown that allowing for perfect capital mobility across countries increases the range of parameter values for which the model permits equilibrium indeterminacy. As opposed to the closed capital markets case, simple restrictions on preferences are no longer sufficient to eliminate the indeterminacy. Intuitively, under perfect capital mobility agents are able to smooth consumption completely. This induces an economy with open capital markets to behave like a closed economy with linear preferences thereby increasing the possibility of equilibrium indeterminacy.

Persistent real exchange rates

This paper revisits three features of the data that are widely known: (a) there exists a high correlation between bilateral nominal and real exchange rates; (b) real exchange rate movements are highly persistent; and (c) real exchange rates are highly volatile. The paper attempts a joint, albeit partial, rationalization of these facts in an environment where prices are preset for only one quarter and there are no staggered contracts. The key innovation is that we augment a standard two-country open economy model with learning-by-doing in production at the firm level. This induces monopolistically competitive firms to endogeneize the productivity effect of their price setting behavior. Specifically, firms endogenously choose not to adjust prices by the full proportion of a positive monetary shock in order to take advantage of the productivity benefits of higher production. We show that the calibrated model can quantitatively reproduce significant fractions of the aforementioned facts.

Exchange rate based stabilizations under real frictions: The role of endogenous labor supply ☆

Abstract This paper studies exchange-rate-based stabilization programs in the context of a model of a small open economy where labor supply is endogenous. Agents derive utility from both consumption and leisure. In environments where consumption is subject to a cash-in-advance constraint, a cut in the rate of devaluation lowers the nominal interest rate and hence alters the optimal mix of consumption and leisure. The paper shows that in the presence of adjustment costs of investment, a perfectly credible cut in the devaluation rate causes, simultaneously, a consumption and output boom, a cumulative current deficit, a sustained real appreciation of the domestic currency and an increase in labor supply over time. It is also shown that an imperfectly credible stabilization program in this environment would have effects similar to the perfectly credible program but generate richer dynamics such as an initial boom in output followed by a recession which begins prior to the end of the program. The model has clear welfare implications in that permanent reductions in inflation are unambiguously welfare enhancing.

Output Costs, Currency Crises and Interest Rate Defence of a Peg

Central banks typically raise short-term interest rates to defend currency pegs. Higher interest rates, however, often lead to a credit crunch and an output contraction. We model this trade-off in an optimising, first-generation model in which the crisis may be delayed but is ultimately inevitable. We show that higher interest rates may delay the crisis, but raising interest rates beyond a certain point may actually bring forward the crisis due to the large negative output effect. The optimal interest rate defence involves setting high interest rates (relative to the no defence case) both before and at the moment of the crisis.

The precious bane

Abstract Are natural resources harmful to growth? We address this question using a two-sector, endogenous growth model in which human capital is the engine of growth. By increasing the rewards to unskilled labor, natural resources make schooling more expensive. As long as the intertemporal elasticity of consumption substitution is not too high, this slows down human capital accumulation and growth. The presence of production spillovers from human capital, however, implies that a planner could react to a resource boom by increasing human capital accumulation even though the decentralized solution yields the exact opposite. The paper also shows that as the production complementarity between natural resources and unskilled labor declines, the growth effects of natural resources become increasingly sensitive to whether or not there is free trade in goods. The empirical evidence lends support to the main channel – natural resources to human capital to growth – that is suggested in the paper.

Economic Growth in an Interdependent World Economy

We outline six facts that should be explained by an international growth model: 1) Conditional convergence; 2) cross-country dispersion of growth rates; 3) cross-country dispersion of per capita income levels; 4) cross-country dispersion of savings rates; 5) within country correlation of savings and investment and 6) cross-country equality of real rates of interest. We argue that the neoclassical model performs poorly in several dimensions and we provide an alternative two-sector endogenous growth model based on the work of Lucas and Romer that can account for all of our stylized facts. Our model accounts for the observation that poor countries grow faster than rich ones (fact number 1) as a consequence of the transitional dynamics of the ratio of physical to human capital. We show that opening capital mobility across countries does not necessarily equate the physical to human capital ratios across countries despite the resultant equalization of factor prices.