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Policy instruments to avoid output collapse: an optimal control model for India

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  • Sushanta Mallick

Abstract

This paper identifies the key policy instruments to be monitored in order to avoid output collapse in the short run for developing countries that come under the IMF-supported adjustment programmes. Changes in exchange rate and aggregate domestic credit are the standard instruments in a Fund-supported policy package used to target balance of payments (BOP) improvement and inflation reduction. Within a small macroeconometric policy-oriented model of India, this paper carries out optimal control exercises to obtain optimal policies for desired targets. The analysis thus carried out indicates that demand contraction based on domestic credit restriction leads to improvement in the BOP and reduction in inflation rather than increased output. This paper suggests using instruments such as credit flow to the private sector on the monetary side, and public spending on basic infrastructure on the fiscal side, so as to make adjustment programmes growth-oriented even in the short term.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Applied Financial Economics.

Volume (Year): 16 (2006)
Issue (Month): 10 ()
Pages: 761-776

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Handle: RePEc:taf:apfiec:v:16:y:2006:i:10:p:761-776

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References

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  1. Easterly, William, 1999. "The ghost of financing gap: testing the growth model used in the international financial institutions," Journal of Development Economics, Elsevier, vol. 60(2), pages 423-438, December.
  2. Dornbusch, Rudiger, 1990. "Policies to Move from Stabilization to Growth," CEPR Discussion Papers 456, C.E.P.R. Discussion Papers.
  3. Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," NBER Working Papers 5146, National Bureau of Economic Research, Inc.
  4. Rodríguez, Francisco & Rodrik, Dani, 1999. "Trade Policy and Economic Growth: A Sceptic's Guide to the Cross-National Evidence," CEPR Discussion Papers 2143, C.E.P.R. Discussion Papers.
  5. Banerjee, Abhijit & Bacchetta, Philippe & Aghion, Philippe, 2001. "Currency Crises and Monetary Policy in an Economy with Credit Constraints," Scholarly Articles 4554218, Harvard University Department of Economics.
  6. Khan, Mohsin S. & Montiel, Peter & Haque, Nadeem U., 1990. "Adjustment with growth : Relating the analytical approaches of the IMF and the World Bank," Journal of Development Economics, Elsevier, vol. 32(1), pages 155-179, January.
  7. Satish Chand & Kunal Sen, 1996. "Trade Liberalization and Productivity Growth: Evidence from Indian Manufacturing," Departmental Working Papers 1996-11, The Australian National University, Arndt-Corden Department of Economics.
  8. Przeworski, Adam & Vreeland, James Raymond, 2000. "The effect of IMF programs on economic growth," Journal of Development Economics, Elsevier, vol. 62(2), pages 385-421, August.
  9. Church, Keith B. & Mitchell, Peter R. & Smith, Peter N. & Wallis, Kenneth F., 1996. "Targeting inflation: Comparative control exercises on models of the UK economy," Economic Modelling, Elsevier, vol. 13(2), pages 169-184, April.
  10. Storm, Servaas, 1997. "Domestic constraints on export-led growth: a case-study of India," Journal of Development Economics, Elsevier, vol. 52(1), pages 83-119, February.
  11. Greenaway, David & Morgan, Wyn & Wright, Peter, 2002. "Trade liberalisation and growth in developing countries," Journal of Development Economics, Elsevier, vol. 67(1), pages 229-244, February.
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Cited by:
  1. Jawadi Fredj & Mallick Sushanta K. & Sousa Ricardo M., 2014. "Fiscal policy in the BRICs," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 18(2), pages 15, April.
  2. Mallick, Sushanta K. & Sousa, Ricardo M., 2012. "Real Effects Of Monetary Policy In Large Emerging Economies," Macroeconomic Dynamics, Cambridge University Press, vol. 16(S2), pages 190-212, September.
  3. Sushanta Mallick & Ricardo Sousa, 2013. "Commodity Prices, Inflationary Pressures, and Monetary Policy: Evidence from BRICS Economies," Open Economies Review, Springer, vol. 24(4), pages 677-694, September.
  4. Shawkat Hammoudeh & Duc Khuong Nguyen & Ricardo M. Sousa, 2014. "China’s Monetary Policy and Commodity Prices," Working Papers 2014-298, Department of Research, Ipag Business School.

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