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Policy Disciplining Effect of Capital Account Openness in India

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  • Lekshmi Nair

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Abstract

In this paper, the policy disciplining effect of capital account openness in India is examined by examining the impact of capital account openness on inflation and fiscal deficit. Multivariate modeling, which includes other relevant variables identified in the literature, is used for the analysis. Our results show capital account openness has a strong disciplining effect on inflation whereas it has no significant effect on fiscal deficit. In the case of fiscal deficit, trade openness and number of government changes only are the significant determinants. The moves of the RBI tend to reaffirm the disciplinary effect of capital account openness. In the meantime, since the mid 1990s, RBI kept a strict vigil over inflation and inflation expectations in the context of a more open capital account. One major reason for the problem concerning inflation expectation by RBI is the threat of capital outflow in the face of loose monetary policy and high inflation. Copyright Springer-Verlag 2012

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Bibliographic Info

Article provided by Springer in its journal Transition Studies Review.

Volume (Year): 19 (2012)
Issue (Month): 1 (September)
Pages: 43-57

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Handle: RePEc:spr:trstrv:v:19:y:2012:i:1:p:43-57

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Related research

Keywords: Capital account openness; Disciplining effect; Inflation; Fiscal deficit; E62; E63; F41;

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  1. Maurice Obstfeld, 1998. "The Global Capital Market: Benefactor or Menace?," Journal of Economic Perspectives, American Economic Association, vol. 12(4), pages 9-30, Fall.
  2. Edin, P-A. & Ohlsson, H., 1990. "Political Determinants Of Budget Deficits: Coalition Effects Versus Minority Effects," Papers 1990k, Uppsala - Working Paper Series.
  3. Abhijit Sen Gupta, 2007. "Does Capital Account Openness Lower Inflation?," Working Papers id:843, eSocialSciences.
  4. William C. Gruben & Darryl McLeod, 2001. "Capital account liberalization and disinflation in the 1990s," Center for Latin America Working Papers 0101, Federal Reserve Bank of Dallas.
  5. Woochan Kim, 2003. "Does Capital Account Liberalization Discipline Budget Deficit?," Review of International Economics, Wiley Blackwell, vol. 11(5), pages 830-844, November.
  6. Milton Friedman & Anna J. Schwartz, 1963. "A Monetary History of the United States, 1867-1960," NBER Books, National Bureau of Economic Research, Inc, number frie63-1, May.
  7. David Romer, 1991. "Openness and inflation: theory and evidence," Proceedings, Federal Reserve Bank of San Francisco, issue Nov.
  8. Shang-Jin Wei & Irina Tytell, 2004. "Does Financial Globalization Induce Better Macroeconomic Policies?," IMF Working Papers 04/84, International Monetary Fund.
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