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Investment, Marginal Q, and Net Worth:
Evidence from Europe
-- Jamel E Chichti and Walid Mansour
The paper empirically studies the financing of investment under incentive problems. From the
perspective of informational asymmetries among contracting parties, the firm does not behave as in the
neoclassical framework. By contrast, it bears the restriction to access external funds, when information asymmetry is
severe. After deriving the Q-model, the estimation strategy consists of specifying static and dynamicQ-equations and fitting them using a set of nine OECD European countries. The empirical regularities show that,
even after correcting for the endogeneity problem and controlling for Tobin'sQ, the investment-cash flow sensitivity does not necessarily behave according to the so-called upward monotonic behavior predicted by
Fazzari et al. (1988, 1996 and 2000). The paper therefore supports the theoretical and empirical results of
Kaplan and Zingales (1997 and 2000), Lyandres (2007), and Mansour (2009) casting doubt on the usefulness of
the investment-cash flow sensitivity as a useful metric for financing constraints.
© 2010 IUP. All Rights Reserved.
Bilateral Trade Between India
and Canada: An Error Correction Model
-- Dukhabandhu Sahoo and Bimal Kishore Sahoo
The improvement of the trade balance of India vis-à-vis Canada can be attributed to the devaluation of
Indian rupee as a part of the reform program in July 1991 and the subsequent depreciation of the Indian
currency owing to the managed floating exchange rate regime. However, but for the increasing inflation in the
post-reform period, the result could have been more in favor of India. Thus, the obvious policy prescription
for India is to reduce the inflation rate so that the impact of devaluation and depreciation will be more
prominent on the trade balance, at least with Canada. This suggestion can be tentative as inflation in India could
have been unavoidable owing to its other compulsions. However, the negative response of export of India to
its GDP and its perceived fluctuation in the short run could be a major cause of concern to the policy makers.
© 2010 IUP. All Rights Reserved.
Capital Inflows and Exchange Rate Variations
Under Economic Reforms in India
-- Harinam Singh and Mohd. Muzammil
The inflows of foreign capital into India have been a mixed blessing for the economy. Capital inflows
have been associated with increased investment and rising Gross Domestic Product (GDP). The main focus of
the paper lies in analyzing the behavior of the macroeconomic indicators in relation to the inflows of
foreign capital and exchange rates in India since 1991, the year in which several major reform programs were
initiated. It analyzes the trends in inflows of foreign capital into India and variations in exchange rate of the
Indian rupee and their mutual interdependence over the period 1990-91 to 2007-08. It shows the correlation
between exchange rate and inflows of capital in India, and also between the exchange rate and some
macroeconomic indicators such as GDP and money supply. Further, it also shows the relationship of nominal effective
exchange rate (both trade-based and export-based) with foreign direct investment and foreign portfolio investment
in India. The correlation analysis of selected indicators shows that GDP is strongly related to the exchange
rates of Indian rupee per unit of US dollar, pound sterling and SDR. This suggests that the prevailing
exchange rates helped in the growth of Indian GDP. It also focuses on the effects of inflows of foreign capital on
some macroeconomic variables in India. This paper also studies how the Reserve Bank of India prevents the
exchange rate appreciation associated with rising capital inflows by accumulating foreign exchange reserves and
foreign investments.
© 2010 IUP. All Rights Reserved.
Testing of Savings-Growth Relationship
in India: An Application of Cointegration and
Error Correction Techniques
-- K Dhanasekaran
This paper mainly attempts to examine the causal nexus between Gross Domestic Product (GDP) and
savings (at 1993-94 prices) in India, using the annual observation from 1950-51 to 2002-03. Although a number
of studies have shed light on this issue using time series data, the present study attempts to analyze the
relationship between the variables using cointegration and causality models. The results show the presence of
cointegration between the GDP and savings series implying the presence of a stable long-run relationship between
them. Having verified that GDP and savings are cointegrated, the Granger test indicates the absence of any
causal relationship between the variables in log-difference form. Despite the absence of Granger causality, a
negative coefficient of the error correction term in the regression equation of savings on GDP is observed. This
negative coefficient signifies that savings converge to its long-run equilibrium level.
© 2010 IUP. All Rights Reserved.
Impact of Exchange Rate on Export
of Coconut Products from Sri Lanka
-- Ponniah Sivarajah
The specific objective of the study is to develop a multi-market model for the analysis of alternative
policy options to increase exports of coconut products from Sri Lanka. Secondary data on the production and
exports of coconut products are used. Simulations indicate that depreciation of the rupee exchange rate has a
significant impact on export prices, volume of exports and income of industry stakeholders, but there is no
significant impact on the producer prices or producer incomes, and supply of coconut products. Simulations show
that export prices of coconut products declined for the rupee exchange rate depreciations in real terms. But
in nominal terms, the export prices increased to cause an increase in the exporting firms' income and
government tax revenues, and a modest increase in the industry income. Depreciation of the rupee could raise the
income of exporters and the government tax revenue, which could be used for investing in development of
new technology or factory modernization subsidy schemes. Increased export prices can also boost processing
of coconuts and encourage firms to export more coconut products. But the depreciation of the rupee has
larger ramifications on the economy as a whole, thus it is not a viable policy option to choose for the long run.
© 2010 IUP. All Rights Reserved.
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