Gurnain Kaur Pasricha

Indian Capital Control Liberalization: Evidence from NDF Markets

This paper analyzes the extent to which the effectiveness of capital controls in India have changed over time. We begin by calculating deviations from covered interest parity utilizing data from the 3-month offshore non-deliverable rupiah forward (NDF) market. Then, using the self-exciting threshold autoregression methodology, we estimate a no-arbitrage band whose boundaries are determined by transactions costs and by the effectiveness of capital controls. Inside the bands, small deviations from CIP follow a random walk process. Outside the bands, profitable arbitrage opportunities exist and we estimate an adjustment process back towards the boundaries. We identify three distinct periods, and estimate the model over each sub-sample in order to capture the de facto effect of changes in capital controls over time. We find that de facto capital control barriers: (1) are asymmetric over inflows and outflows, (2) have changed over time from primarily restricting outflows to effectively restricting inflows; (3) arbitrage activity closes deviations from CIP when the threshold boundaries are exceeded in all sub-samples. In recent years, capital controls have been more symmetric over capital inflows and outflows and the deviations from CIP outside the boundaries are closed more quickly.

Financial Integration in Emerging Market Economies

This paper analyzes de-facto integration in some Emerging Market Economies based on behavior of deviations from Covered Interest Parity in the last decade. An Asymmetric Self Exciting Threshold Autoregressive model is used to estimate bands of speculative inaction. The estimated bands follow the pattern expected, and reveal a rational market in the sense that deviations from parity are self correcting. The paper uses information from the estimated models to construct a new index of de-facto integration. Such a price-based measure of integration is crucial to studies of effectiveness of controls and of impact of capital openness on macroeconomic variables.

NET FISCAL STIMULUS DURING THE GREAT RECESSION

This paper studies the patterns of fiscal stimuli in the OECD countries propagated by the global crisis. Overall, we find that the USA net fiscal stimulus was modest relative to peers, despite it being the epicenter of the crisis, and having access to relatively cheap funding of its twin deficits. The USA is ranked at the bottom third in terms of the rate of expansion of the consolidated government consumption and investment of the 28 countries in sample. Contrary to historical experience, emerging markets had strongly countercyclical policy during the period immediately preceding the Great Recession and the Great Recession. Many developed OECD countries had procyclical fiscal policy stance in the same periods. Federal unions, emerging markets and countries with very high GDP growth during the pre-recession period saw larger net fiscal stimulus on average than their counterparts. We also find that greater net fiscal stimulus was associated with lower flow costs of general government debt in the same or subsequent period.

The Net Fiscal Expenditure Stimulus in the US, 2008-9: Less than What You Might Think, and Less than the Fiscal Stimuli of Most OECD Countries

Understanding how the economy reacted to fiscal stimulus in the aftermath of the deepest recession of the last fifty years is essential. Joshua Aizenman of the University of California, Santa Cruz, and Gurnain Kaur Pasricha of the Santa Cruz Institute for International Economics and the Bank of Canada show that aggregate fiscal expenditure stimulus in the United States, properly adjusted for the declining fiscal expenditure of the fifty states, was close to zero in 2009. Furthermore, the USA is ranked at the bottom third in terms of the rate of expansion of the consolidated government consumption and investment of the 28 OECD countries they studied recently.

Motivations for Capital Controls and Their Effectiveness

We assess the motivations for changing capital controls and their effectiveness in India, a country with extensive and long-standing controls. We focus on the controls on foreign borrowing that can, in principle, be motivated by macroprudential concerns. We construct a fine-grained data set on capital control actions on foreign borrowing in India. Using event study methodology, we assess the factors that influence these capital control actions, the main factor being the exchange rate. Capital controls are tightened after appreciation, and eased after depreciation, of the exchange rate. Macroprudential concerns, measured by variables that capture systemic risk buildups, do not seem to be a factor shaping the use of capital controls. To assess the impact of controls, we use both event study and propensity score matching methodologies. Event study methodology suggests no impact of capital controls on most variables evaluated, but reveals limited evidence that capital controls relieve currency pressures in the short term. However, even this limited evidence disappears once selection bias is controlled for.

Bank Competition and International Financial Integration: Evidence using a new index

In the debate on the benefits and costs of international financial integration recent literature has emphasized thresholds in the development of domestic markets as preconditions to benefitting from international integration. This paper offers an alternative view - that of development of competition in domestic markets as an aide to de-facto openness. Lack of competition in domestic financial systems may prevent countries from reaping the benefits of international integration simply because they prevent countries from being integrated in a meaningful way - that of price equalization. Using a new index of de facto financial openness, this paper explores the trends in and determinants of cross border integration of interbank markets. It finds a strong link between greater competitiveness in domestic banking and international integration. The level of de jure controls, volatility and institutions matter for price integration but their importance differs between developed and developing countries.

Domestic and multilateral effects of capital controls in emerging markets

Using a novel, high frequency dataset on capital control actions in 16 emerging market economies (EMEs) from 2001 to 2012, we provide new evidence on the domestic and multilateral effects of capital controls. Increases in capital account openness reduce monetary policy autonomy and increase exchange rate stability, confirming the constraints of the monetary policy trilemma. Both gross in- and outflows rise, while the effect on net capital flows is ambiguous. Tighter capital inflow restrictions generated significant spillovers, especially in the post-2008 environment of abundant global liquidity. We also find evidence of a domestic policy response to foreign capital control changes in countries that are affected by these spillovers.

Exchange Rate Trends and Management in India

This paper evaluates developments in India’s nominal and real exchange rates over the past two decades, describing longer term trends as well as short-term movements and volatility. In addition, we evaluate the motivation and impact of exchange rate policy in India, including its interaction with domestic monetary policy. We find substantial divergences between nominal and real exchange rate trends, and between Indian multilateral and bilateral Rupee-USD longer-term exchange rate movements. Beyond long-term trends, Rupee exchange rate movements and volatility have evolved through several distinct episodes. In particular, exchange rate volatility increased markedly from the mid-2000s, especially since the Global Financial Crisis. The RBI used foreign exchange market intervention and an active capital control policy to influence the level and limit volatility of the exchange rate, an official policy objective. However, these policies have had limited effect on the exchange rate. Against a background of a trend increase in financial openness and, perhaps most importantly, increasing external shocks, the RBI appears to have accepted more instability in the exchange rate in favor of greater monetary independence. Since the GFC , however, greater monetary independence seems to have focused more on stimulating growth and employment rather than low inflation. Only since 2014 has the RBI focused on low inflation as a primary domestic objective.