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Optimal Monetary Policy Rules in Iran:
A Welfare Analysis
--Vahid Taghinejad Omran, Mohammad Ali Ehsani
and Mohsen Mohammadi Khyareh
Following a monetary growth rate rule, the present paper ranks four simple monetary rules under various stochastic shocks. The criteria to choose among rules are obtained using a welfare criterion derived from the utility function of the representative agent. The main results are: the effects of alternative monetary rules depend on what shocks affect the economy, exchange rate regime and the inflation index being targeted; with regard to the monetary rules, managed exchange rate rule dominates the other rules under demand or supply shocks, whereas domestic inflation targeting is the best performer under real shocks. As far as the definition of inflation targeting index is concerned, CPI inflation targeting appears to outperform the domestic inflation targeting under demand or supply shocks.
© 2015 IUP. All Rights Reserved.
Inflation, Inflation Volatility and Economic Growth:
The Case of India
--Simran Sethi
This paper examines the relationship between inflation, inflation volatility and economic growth for India, using both Consumer Price Index (CPI) for industrial workers and Wholesale Price Index (WPI). The study using annual data over the period 1980-2014, reveals that the level of inflation (both CPI and WPI) has negative but insignificant effect on economic growth. To analyze the impact of inflation uncertainty on growth, the study calculates inflation volatility as the fivepoint moving average of coefficient of variation of inflation. The results show that the coefficient of inflation volatility is negative and significant. This signifies that high inflation and inflation uncertainty adversely affect economic growth. Granger causality test is also used to measure the direction of causality between inflation and growth. When CPI is used as a measure of inflation, at an optimal lag length 3, there is no causality between inflation and growth. As more lags are added, the results indicate unidirectional causality from GDP growth to inflation. With WPI, the results show that causality runs from GDP growth to inflation at lag 1, which is found to be optimal. However, WPI inflation and GDP growth are found to be independent of each other as more lags are added to the model during the period of study. Hence, reducing inflation and maintaining price stability is imperative for economic growth.
© 2015 IUP. All Rights Reserved.
On the Analytical Perspectives of Real-Financial Interaction
--Subhasankar Chattopadhyay
The link between real and financial markets is a perennial source of debate and research in macro-finance. The issue resurfaces time and again in different forms: Does the functioning of financial systems have any effect on real activity (commodity market)? What is the possible relation between ‘financial’ claims and ‘real’ claims? These questions have gained tremendous currency once again after the subprime crisis and the recent ‘great recession’ in the Euro zone. The purpose of this paper is to analyze how the ‘virtual’ economy, captured through the stock market (because stock markets are an integral part of contemporary financial systems), interacts with the ‘real’ economy producing goods and services. The paper tries to critically understand the short-run interconnections between the expansion of aggregate demand through wealth effect generated by stock market and macroeconomic stability. The paper finds that in a dynamic IS-LM type model with wealth effect, there is a possibility of multiple equilibria and some of them are not stable. Given monetary authority’s emphasis on reducing financial market instability, a stabilization program exercised through monetary policy may fail to work when wealth effect is significant. Instead, redistribution of income through tax may turn out to be more effective.
© 2015 IUP. All Rights Reserved.
Causality Between FDI Inflows and Export with Reference to India:
An Analysis
--Anurag Bahadur Singh and Priyanka Tandon
Foreign Direct Investment (FDI) is the important means of promoting export. There has been an increase in the FDI in India depicting that Indian economy is an attractive place to invest in and operate business. In this paper, an attempt has been made to analyze the causal relationship between FDI and export in India. Using data from 1990 to 2013 for FDI and export from DBIE (website of RBI), the analysis is done using unit root testing, Johansen cointegration test and Granger causality test through Eviews. The paper concludes that neither FDI Granger-causes export nor export Granger-causes FDI.
© 2015 IUP. All Rights Reserved.
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