Economics Journals| The Effect of Real Exchange Rate

The Einstein relation which is known as the Fluctuation-Dissipation (FD) theorem in physics is applied to financial time series data in this paper. The fundamental equation for the time series is the generalized Langevin equation with colored noise. The autocorrelation function and the probability density function are derived from this equation and the Einstein relation. Those functions are then fitted to the sample autocorrelation and the histogram by means of nonlinear regression and all the parameters in this formalism are estimated consistently. This paper shows that the Einstein relation is useful in the stochastic time series analysis.

Foreign Capital Inflow and Economic Growth Nexus: A Case Study of Pakistan

-- Qazi Muhammad Adnan Hye, Muhammad Shahbaz and Amra Hye

This study analyzes the effect of Foreign Capital Inflow (FCI) on the economic growth of a developing economy, like Pakistan. Empirical analysis has been performed by using a recent cointegration technique, Autoregressive Distributed Lag (ARDL) method. The result shows that foreign direct investment affects economic growth positively in the long run as well as short run. On the other hand, the official development assistance and aid has positive impact on economic growth only in the long run. So, Pakistan should focus on the official development assistance and aid in the long run for the sake of economic growth.

Pooled Mean Group Estimation of the Bilateral Inpayments and Outpayments for Bangladesh vis-à-vis Major Trading Partners

-- Gour Gobinda Goswami and Kazi Sabbir Ahmed

In addressing the issue of short-run heterogeneity as well as long-run homogeneity of the estimated coefficients in a panel framework, the Pooled Mean Group (PMG) estimator (Pesaran et al., 1999) has gained popularity in applied research in economics and business recently. This estimation method has been used successfully in the context of bilateral trade balance estimation for the US with its major trading partners (Goswami and Junayed, 2006), and in another context the bilateral exports and imports model has been extended by modeling bilateral inpayments and outpayments separately for Japan and its major trading partners (Bahmani-Oskooee and Goswami, 2004) by using Autoregressive Distributed Lag (ARDL) approach to cointegration on a partner-by-partner basis. The major limitations of these kind of bilateral models is low power and resulting wrong sign and insignificance of the estimated coefficients due to functional misspecification, multicollinearity as well as omitted variable bias which call for a panel setup in the light of bilateral framework. The present paper fills this gap in the existing literature by estimating both the equations of bilateral inpayments and outpayments for Bangladesh vis-à-vis its 15 major trading partners for the period 1973Q3-2004Q2 using the PMG estimation. The paper reveals that the speed of adjustment measured by the short-run error correction coefficients is lower in PMG estimation compared to ARDL estimation. This might raise another important research question that panel framework may provide better estimates for major parameters of the model in the long run at the cost of allowing lower speed of adjustments in the short run.

Impact of Global Financial Meltdown on Beta of Selected Scrips

-- N Maruti Rao and Iftikar Ahmed M Naikwadi

Today, the world economy is melting like an ice cube on hot stove. Governments and Central Banks of respective countries around the world have initiated various measures to mitigate the impact of global meltdown such as bailout packages, injecting liquidity into the system. The impact of global meltdown on the Indian economy in general and the financial system in particular can be seen in BSE's crashing and slipping to less than 10,000 points from its peak of 21,000, and industries declaring production cut and job cut. In order to counter the menace of global meltdown the Government of India and RBI have taken various measures to mitigate the impact of global meltdown on Indian economy such as economy stimulus packages, cut in CRR, SLR, repo and reverse repo rates, extension of duty drawback scheme, etc. It has also become a political issue in the country. So, today we are witnessing the impact of global meltdown not only on the economy, financial system, industries and traders but also on the society at large. The present study analyzes one aspect of global meltdown, i.e., the impact of Global Financial Meltdown (GFM) on beta of selected scrips. The purpose is to find out the impact of GFM on beta of few selected Indian companies. It also intends to look into the correlation between few selected systemic risk factors such as Dow Jones Industrial Average index, Foreign Exchange Rate (FER) and Gross Domestic Product (GDP), and the beta of selected scrips.

Impact of Globalization on Agricultural Production, Exports and Imports in Iran

-- Hedayat Hosseinzadeh

Globalization is an inevitable phenomenon. In this study, globalization is defined as a process of growing interdependence between all nations of the world. This linkage is encouraged by market liberalization, and information, communication and transportation technologies. Iran's economy has been shaped by oil export, so the industry and service sectors are mainly dependent on the oil income. But the dependency of the agricultural sector on oil income is very less compared to the other sectors. In 2004, this sector contributed 13.7% to Iran's Gross Domestic Product (GDP) and about 25% and 20% to occupation and Iran's non-oil exports, respectively. This situation shows that agriculture sector, though the smallest sector, plays an effective role in Iran's economy. Its production capacity is large and is capable of exporting to international markets. The results of this paper reveal that globalization has had little impact on Iran's agriculture. But, there is a meaningful difference between the quantity of agricultural production, exports and imports after and before 1995. Moreover, despite some fluctuations in the Intra-Industry Trade (IIT) and the Level of International Trade (LIT) indices, the trend lines of the IIT and LIT indices in general show increasing trend after 1995.

Modeling Volatility for the Indian Stock Market

-- M Thiripalraju and Rajesh Acharya H

This paper is an attempt to model the volatility of the equity data of the two Indian stock markets. The study found volatility clustering in the daily returns of indices. Different GARCH models were estimated for various indices of NSE and BSE, the two premier Indian stock exchanges. GARCH(1, 1) with MA(1) in the mean equation was found to fit better than the other models. The models were used to test the spillover effect between the benchmark indices of the two Indian markets, to test for the possibility of volatility transmission within a country and between the two exchanges. The study found volatility transmission between the two markets.

Understanding Exchange Rate Expectations in India

-- Mita H Suthar

Generally it is believed that the central monetary authority can, and should, exercise control over the exchange rate only in case of fixed/pegged exchange rate regime. However, such a regulation is essential even in an economy that has adopted floating exchange rate policy. This is because no economy can stay immune to the extreme external shocks that affect the domestic economic stability through exchange rate channel. These shocks may be due to changes in the trade balance and relative terms of trade, purchasing power of the two currencies, capital movements, and differences in the general price levels of the two economies under consideration. Especially, when the economy is open to capital movements, the expectations regarding forward exchange rate play an important role in deciding the capital flows as well as the actual exchange rates in future. And, if unguarded, the fluctuations in the exchange rate can cause deep financial crisis in any economy regardless of its size and dependence on the external sector. This paper makes an attempt to define such a relation between the capital movements and the forward exchange rate through the Covered Interest Parity (CIP) model. Monthly data from April 1996 to May 2008, relating to Indian and the US economies, are used for establishing this hypothesis. A comparative analysis of the CIP model with the Uncovered Interest Parity (UIP) model indicates that the former is more efficient in projecting the forward exchange rate movements with greater accuracy. The ability to forecast the future exchange rate based on the same model is an added advantage of adopting the CIP for monitoring the exchange rate and capital movements in India.

Power Sector Regulatory Governance in Orissa

-- Lopamudra Mishra and Tushar Kanti Das

An effective institutional framework is essential to sustain growth in output, efficiency and capacity of the utility service sectors. The regulatory agency is intended to provide the `high quality institution' , which permits and fosters sustained growth in capacity and efficiency in utility service industries. While analyzing sustained economic growth of any state, the supportive role extended by these institutions should be taken into account. The present paper provides an assessment of the effects of privatization and regulation on the power sector of Orissa, India.