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A dynamic macroeconometric model for short-run stabilization in India

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  • Sushanta Mallick

Abstract

A small macroeconometric model examining the determinants of India's trade and inflation is developed to address the effects of a reform policy package similar to those implemented in 1991. This is different from the previous studies in two important respects. First, inflation has been modelled in an open economy context, and second, the non-stationarity of the data into the model and estimation procedures has been explicitly incorporated, suggesting that the stationarity assumption in earlier studies may be a source of misspecification. The model in this paper has been estimated using data from 1950 to 1995 employing fully modified Phillips-Hansen method of estimation to obtain the cointegrating relations and the short-run dynamic model. Policy simulations using dynamic simulation method compare the responses to devaluation with the responses to tight credit policy. It is shown that the trade balance effects of tight credit policy are more enduring than that of devaluation. The simulations demonstrate that the devaluation actually worsens trade balance and hence devaluation cannot be an option in response to a negative trade shock, whereas the reduction in domestic credit reflecting demand contraction produces a desirable improvement in the trade balance.

Suggested Citation

  • Sushanta Mallick, 2004. "A dynamic macroeconometric model for short-run stabilization in India," Applied Economics, Taylor & Francis Journals, vol. 36(3), pages 261-276.
  • Handle: RePEc:taf:applec:v:36:y:2004:i:3:p:261-276
    DOI: 10.1080/0003684042000175361
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    1. Peter C. B. Phillips & Bruce E. Hansen, 1990. "Statistical Inference in Instrumental Variables Regression with I(1) Processes," Review of Economic Studies, Oxford University Press, vol. 57(1), pages 99-125.
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    7. Sedgley, Nigel & Smith, Jeremy, 1994. "An Analysis of UK Imports Using Multivariate Cointegration," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 56(2), pages 135-150, May.
    8. Kamal Upadhyaya & Dharmendra Dhakal, 1997. "Devaluation and the trade balance: estimating the long run effect," Applied Economics Letters, Taylor & Francis Journals, vol. 4(6), pages 343-345.
    9. Lucas, Robert E. B., 1988. "Demand for India's manufactured exports," Journal of Development Economics, Elsevier, vol. 29(1), pages 63-75, July.
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    Cited by:

    1. Valadkhani, Abbas, 2005. "Macroeconometric Modelling: Approaches and Experiences in Developing Countries," Economics Working Papers wp05-10, School of Economics, University of Wollongong, NSW, Australia.
    2. Valadkhani, A., 2005. "Macroeconomic Modelling: Approaches and Experiences in Development Countries," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 5(1).
    3. Holtemöller, Oliver & Mallick, Sushanta, 2015. "Global Food Prices and Business Cycle Dynamics in an Emerging Market Economy," IWH Discussion Papers 15/2015, Halle Institute for Economic Research (IWH).
    4. Holtemöller, Oliver & Mallick, Sushanta, 2016. "Global food prices and monetary policy in an emerging market economy: The case of India," Journal of Asian Economics, Elsevier, vol. 46(C), pages 56-70.

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