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Economic reforms, capital inflows and macro economic impact in India

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  • Indrani Chakraborty

    (Centre for Development Studies)

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    Abstract

    The study attempts to explain the effects of inflows of private foreign capital on some major macroeconomic variables in India using quarterly data for the period 1993-99.The analyses of trends in private foreign capital inflows and some other variables indicate instability. Whereas net inflows of private foreign capital (FINV),foreign currency assets,wholesale price index,money supply,real and nominal effective exchange rates and exports follow an I(1)process,current account deficit is the only series that follows I(0).Cointegration test confirms the presence of long-run equilibrium relationships between a few pairs of such cointegration except in two cases:cointegration exists between foreign currency assets and money supply and between nominal effective exchange rate and exports,even after controlling for FINV. The Granger Causality Test shows unidirectional causality from FINV to nominal effective exchange rates-both trade-based and export-based-, which raises concern about the RBI strategy in the foreign exchange market. Finally, instability in the trend of foreign currency assets could be partially explained by the instability in FINV with some lagged effect.

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    Bibliographic Info

    Paper provided by Centre for Development Studies, Trivendrum, India in its series Centre for Development Studies, Trivendrum Working Papers with number 311.

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    Length: 47 pages
    Date of creation: Jan 2001
    Date of revision:
    Handle: RePEc:ind:cdswpp:311

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    Related research

    Keywords: Private foreign capital; economic reforms; instability; India;

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    1. Granger, C. W. J., 1981. "Some properties of time series data and their use in econometric model specification," Journal of Econometrics, Elsevier, vol. 16(1), pages 121-130, May.
    2. Reinhart, Carmen & Khan, Mohsin, 1995. "Macroeconomic Management in APEC Economies: The Response to Capital Inflows," MPRA Paper 8148, University Library of Munich, Germany.
    3. Ghosh, Atish R, 1995. "International Capital Mobility amongst the Major Industrialised Countries: Too Little or Too Much?," Economic Journal, Royal Economic Society, vol. 105(428), pages 107-28, January.
    4. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
    5. Granger, C. W. J. & Newbold, P., 1974. "Spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 2(2), pages 111-120, July.
    6. Abul M. M. Masih & Rumi Masih, 1994. "Temporal Causality Between Money and Prices in LDCs and the Error-Correction Approach: New Evidence from India," Indian Economic Review, Department of Economics, Delhi School of Economics, vol. 29(1), pages 33-35, January.
    7. Corbo, Vittorio & Hernandez, Leonardo, 1996. "Macroeconomic Adjustment to Capital Inflows: Lessons from Recent Latin American and East Asian Experience," World Bank Research Observer, World Bank Group, vol. 11(1), pages 61-85, February.
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