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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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  • Sushanta Mallick, 2006. "Policy instruments to avoid output collapse: an optimal control model for India," Applied Financial Economics, Taylor & Francis Journals, vol. 16(10), pages 761-776.
  • Handle: RePEc:taf:apfiec:v:16:y:2006:i:10:p:761-776
    DOI: 10.1080/09603100600684948
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    References listed on IDEAS

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    1. Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 27-48, Fall.
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    Cited by:

    1. Sushanta K. Mallick, 2014. "Disentangling the Poverty Effects of Sectoral Output, Prices, and Policies in India," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 60(4), pages 773-801, December.
    2. 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 1-15, April.
    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. Jawadi, Fredj & Mallick, Sushanta K. & Sousa, Ricardo M., 2016. "Fiscal and monetary policies in the BRICS: A panel VAR approach," Economic Modelling, Elsevier, vol. 58(C), pages 535-542.
    5. 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.
    6. 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.
    7. repec:eee:ecmode:v:71:y:2018:i:c:p:184-201 is not listed on IDEAS

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