ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Dynamic Stochastic General Equilibrium Modelling

In recent years Dynamic Stochastic General Equilibrium models have come to play an increasing role in central banks, as an aid in the formulation of monetary policy (and increasingly after the global crisis, for maintaining financial stability). DSGE models, it is claimed, are less a-theoretic than other widely used models such as VAR, or dynamic factor models. As the models are "structural," they are supposed to be immune to the Lucas Critique, and thus can be "taken to the data" in a meaningful way. However, a major feature of these models is that their theoretical underpinnings lie in what has now come to be called as the New Consensus Macroeconomics. Using the prototype real business cycle model as an illustration, this paper brings out the econometric structure underpinning such models. A detailed analytical critique is also presented together with some promising leads for future research.

Yojana Bhawan: Obiter Dictum

Now that the government has decided to abolish the Planning Commission and create a new body in its place, the question is what form and shape should the replacement take? Three articles discuss different aspects of the old and the likely new body. The first article here offers a detailed review of the history of planning dating from the Soviet era and outlines the different strands of thought that fed into the Indian experience with planning and argues that what was needed was a restructuring of the commission and not its abolition.

Repacking the Punch in Monetary Policy

In the wake of financial deregulation and innovation, monetary policy has seen considerable erosion of its potency. Simultaneously, monetary policy has been loaded with several additional onerous responsibilities. In such a situation, the single instrument of the repo rate (supplemented with the cash reserve ratio) exhibits considerable strain in striking a balance between the conflicting objectives of growth, inflation control and financial stability. The interest rate also turns out to be a blunt instrument, leading to blunderbuss and debt footprint effects. To overcome the imbalance between targets and instruments, a maverick suggestion has emerged, viz, shifting the reserves from the liability to the asset side of financial institutions' balance sheets. Asset-based reserve requirements share some similarities with capital requirements and dynamic loan loss provisioning, but differ from these in important details. This paper examines the implications of ABRRs for monetary policy, together with their limitations and difficulties of implementation in an emerging market economy like India.

Global Crisis and the New Consensus Macroeconomics

Prior to the global crisis, the state of macroeconomic theory was relatively settled, with mainstream economists subscribing to a hybrid classical-cum-Keynesian theory - the so-called New Consensus Macroeconomics. The crisis was widely perceived as an outcome of some of the faulty policies implied by the NCM. This prompted a serious re-examination and criticism of the theoretical foundations of the NCM from four distinct schools of thought, viz, the post-eynesian, Austrian, Structuralist and Marxist. The dominant critique seems to be the post-Keynesian and most of the revisions in post-crisis macroeconomic policy have also been along these lines. This paper delves into the theoretical structure as well as the policy implications of the post-Keynesian critique of the NCM. Certain implications are drawn for macroeconomic policy and cautionary caveats are entered for the process of financialisation currently under way in several emerging market economies.

The Fate of India Unincorporated

While evaluating the Indian policy responses to the global crisis, this article focuses on the likely extent of the spread of the crisis to India and how it will affect the domestic economy. In India, exports have declined, foreign institutional investment has fallen, and share and real estate prices have crashed. The social cost of the slowdown has been unemployment. India's policy response has so far addressed the issue of reviving the real economy but has done little to build firewalls around the financial sector and provide safety nets for the vulnerable sections. Some measures which could go a long way towards attainment of the last two objectives are outlined.

Obituary : P R Brahmananda

P R Brahmananda's was a truly versatile spirit, which ranged over virtually all areas of economics with almost promiscuous abandon.

Asian Eclipse India and China in the Penumbra

Asian Eclipse: India and China in the Penumbra? Ajit S Bhalla Dilip M Nachane Competing explanations of the Asian crisis are clustered around four factors, acting singly or in conjunction: (i) structural aspects, (ii) macro-economic imbalances, (iii) financial failures, and (iv) self-fulfilling or sunspot features. The authors' preference is for the financial explanation, though this does not amount to complete disavowal of the responsibility of structural factors in precipitating the crisis. The financial collapse was the logical culmination of an inappropriate financial liberalisation strategy with volatile capital flows acting as a triggering factor. The IMF's misdiagnosis played a part in aggravating the crisis and in prolonging its duration.
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