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Liberalization Policy: ‘Fits & Starts’ or Gradual Change in India

  • Mohammed I Ansari

    (Radford University)

  • Ira N Gang

    (Rutgers University)

In this paper we assess the impact of external economic liberalization in India on the transmission of aggregate shocks. We examine the relative importance of domestic and external shocks and capture their feedback effects by estimating an eight variable vector autoregression (VAR) model. We also test two propositions regarding the nature of India's liberalization policy: 1) under intermittency (or ‘fits and starts’) the transmission of aggregate shocks in the post-reform period is compared with two pre-reform periods; and 2) under gradualism the transmission of aggregate shocks over three consecutive episodes of economic reform are compared. Our test first consists of a simple regression analysis using output, interest rates, and prices for India and its world counterparts. The analysis is extended to include dummy variables and distributed lags method. Finally, we apply the recursive regression method and Chow-tests to uncover breaks in the estimated parameters. The preponderance of evidence suggests that India's liberalization policy has followed a continuous and smooth path, at least since the mid 1970s.

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Article provided by Palgrave Macmillan in its journal Comparative Economic Studies.

Volume (Year): 41 (1999)
Issue (Month): 4 (December)
Pages: 23-46

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Handle: RePEc:pal:compes:v:41:y:1999:i:4:p:23-46
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  1. Michael R. Darby & James Lothian, 1989. "The International Transmission of Inflation Afloat," NBER Chapters, in: Money, History, and International Finance: Essays in Honor of Anna J. Schwartz, pages 203-244 National Bureau of Economic Research, Inc.
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  3. Burdekin, Richard C. K., 1989. "International transmission of US macroeconomic policy and the inflation record of Western Europe," Journal of International Money and Finance, Elsevier, vol. 8(3), pages 401-423, September.
  4. Darby, Michael R. & Lothian, James R. & Gandolfi, Arthur E. & Schwartz, Anna J., 1983. "The International Transmission of Inflation," National Bureau of Economic Research Books, University of Chicago Press, edition 0, number 9780226136417.
  5. Martin Eichenbaum & Kenneth I. Singleton, 1986. "Do Equilibrium Real Business Cycle Theories Explain Postwar U.S. Business Cycles?," NBER Chapters, in: NBER Macroeconomics Annual 1986, Volume 1, pages 91-146 National Bureau of Economic Research, Inc.
  6. Richard M. Todd, 1990. "Vector autoregression evidence on monetarism: another look at the robustness debate," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, pages 19-37.
  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. Spencer, David E, 1989. "Does Money Matter? The Robustness of Evidence from Vector Autoregressions," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 21(4), pages 442-54, November.
  9. Hans GENBERG & Michael K. SALEMI, 1987. "The Effects of Foreign Shocks on Prices of Swiss Goods and Credit: An Analysis Based on VAR Method," Annales d'Economie et de Statistique, ENSAE, issue 6-7, pages 101-124.
  10. Jagdish N. Bhagwati & T. N. Srinivasan, 1975. "Foreign Trade Regimes and Economic Development: India," NBER Books, National Bureau of Economic Research, Inc, number bhag75-1, October.
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  12. McCarthy, F. Desmond & Neary, J. Peter & Zanalda, Giovanni & DEC, 1994. "Measuring the effect of external shocks and the policy response to them : empirical methodology applied to the Philippines," Policy Research Working Paper Series 1271, The World Bank.
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