Rudrani Bhattacharya

Monetary policy transmission in an emerging market setting

Some emerging economies have a relatively ineffective monetary policy transmission owing to weaknesses in the domestic financial system and the presence of a large and segmented informal sector. At the same time, small open economies can have a substantial monetary policy transmission through the exchange rate channel. In order to understand this setting, we explore a unified treatment of monetary policy transmission and exchangerate pass-through. The results for an emerging market, India, suggest that the most effective mechanism through which monetary policy impacts inflation runs through the exchange rate.

Export Versus FDI in Services

In the literature on exports and investment, most productive firms are seen to invest abroad. In the Helpman et al. (2004) model, costs of transportation play a critical role in the decision about whether to serve foreign customers by exporting, or by producing abroad. We consider the case of tradable services, where the marginal cost of transport is near zero. We argue that in the purchase of services, buyers face uncertainty about product quality, especially when production is located far away. Firm optimisation then leads less productive firms to self-select themselves for FDI. We test this prediction with data from the Indian software industry, and find support for it.

Emerging Economy Business Cycles : Financial Integration and Terms of Trade Shocks

This paper analyses the extent to which financial integration impacts the manner in which terms of trade affct business cycles in emerging economies. Using a small open economy model, we show that as capital account openness increases in an economy that faces trade shocks, business cycle volatility reduces. For an economy with limited financial openness, and a relatively open trade account, a model with exogenous terms of trade shocks is able to replicate the features of the business cycle.

Credit Constraints, Productivity Shocks and Consumption Volatility in Emerging Economies

How does access to credit impact consumption volatility? Theory and evidence from advanced economies suggests that greater household access to finance smooths consumption. Evidence from emerging markets, where consumption is usually more volatile than income, indicates that financial reform further increases the volatility of consumption relative to output. We address this puzzle in the framework of an emerging economy model in which households face shocks to trend growth rate, and a fraction of them are credit constrained. Unconstrained households can respond to shocks to trend growth by raising current consumption more than rise in current income. Financial reform increases the share of such households, leading to greater relative consumption volatility. Calibration of the model for pre and post financial reform in India provides support for the models key predictions.

What Role Did Rising Demand Play in Driving Food Prices Up

Average food inflation in India during the period 2006–2013 was one of the highest among emerging market economies and nearly double the inflation witnessed in India during the previous decade. An often-cited hypothesis argues that the surge in food inflation during this period was driven by rising demand for high-value food products due to higher per capita income and diversification of Indian diets. In this article, we test the validity of this hypothesis by estimating the expenditure elasticity and then calculating the aggregate demand using data from household survey conducted by the National Sample Survey Organisation (NSSO). Our results show that in recent years, estimated demand has exceeded supply of all major food products, barring fruits. Moreover, empirical estimates indicate that the demand–supply gap is an important driver of rise in food prices, along with other factors such as minimum support prices, global prices, fiscal deficit and agricultural wages. JEL Classification: E31, E37, Q11

Drivers and impact of food inflation in India

ABSTRACT Average food inflation in India during 2006–2013 was one of the highest among emerging market economies, and nearly double the inflation witnessed in India during the previous decade. In this paper, we analyse the behaviour and determinants of food inflation over the recent past. Our main findings include that recent surge in food inflation in India is a result of various factors. On the cost side, agricultural wage inflation is found to be a universal driver of food commodities inflation, as well as the aggregate food inflation. The contribution of agricultural wages has increased significantly in the post Mahatma Gandhi National Rural Employment Act era. Fuel inflation has a moderate impact on food inflation and the effects vary across commodities. Our analysis indicates limited role of fuel and international prices, except for in tradeables. Finally, results suggest significant pass-through effects from food to non-food and to the headline inflation.