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Why India choked when Lehman broke

  • Ila Patnaik

    (NIPFP)

  • Ajay Shah

India has an elaborate system of capital controls which impede cap- ital mobility and particularly short-term debt. Yet, when the global money market fell into turmoil after the bankruptcy of Lehman Broth- ers on 13/14 September 2008, the Indian money market immediately experienced considerable stress, and the operating procedures of mon- etary policy broke down. We suggest that Indian multinationals were using the global money market and were short of dollars on 15 Septem- ber. They borrowed in India and took capital out of the country. We make three predictions that follow from this hypothesis, and _nd that the evidence matches these predictions. This suggests an important role for Indian multinationals in India's evolution towards de facto convertibility.

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File URL: http://saber.eaber.org/node/22974
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Paper provided by East Asian Bureau of Economic Research in its series Finance Working Papers with number 22974.

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Date of creation: Jan 2010
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Handle: RePEc:eab:financ:22974
Contact details of provider: Postal: JG Crawford Building #13, Asia Pacific School of Economics and Government, Australian National University, ACT 0200
Web page: http://www.eaber.org

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  1. Mihir A. Desai & C. Fritz Foley & James R. Hines, 2004. "A Multinational Perspective on Capital Structure Choice and Internal Capital Markets," Journal of Finance, American Finance Association, vol. 59(6), pages 2451-2487, December.
  2. Ajay Shah & Ila Patnaik, 2007. "India's Experience with Capital Flows: The Elusive Quest for a Sustainable Current Account Deficit," NBER Chapters, in: Capital Controls and Capital Flows in Emerging Economies: Policies, Practices and Consequences, pages 609-644 National Bureau of Economic Research, Inc.
  3. Eswar S. Prasad, 2009. "Some New Perspectives on India's Approach to Capital Account Liberalization," NBER Working Papers 14658, National Bureau of Economic Research, Inc.
  4. Sebastian Edwards, 2007. "Capital Controls, Sudden Stops, and Current Account Reversals," NBER Chapters, in: Capital Controls and Capital Flows in Emerging Economies: Policies, Practices and Consequences, pages 73-120 National Bureau of Economic Research, Inc.
  5. Dilek Demirbas & Ila Patnaik & Ajay Shah, 2010. "Graduating to Globalisation : A Study of Southern Multinationals," Finance Working Papers 21854, East Asian Bureau of Economic Research.
  6. Prasad, Eswar, 2009. "India's Approach to Capital Account Liberalization," IZA Discussion Papers 3927, Institute for the Study of Labor (IZA).
  7. Eswar S. Prasad, 2009. "India’s Approach to Capital Account Liberalization," Working Papers id:2043, eSocialSciences.
  8. Guillermo A. Calvo, 1998. "Capital Flows and Capital-Market Crises: The Simple Economics of Sudden Stops," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 35-54, November.
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