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

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Do Foreign Banks in India Indulge in 'Cream Skimming'?

Foreign banks in developing countries are often found to indulge in "cream skimming," a lending strategy that targets only wealthy segments of the credit market and excludes small and marginal borrowers from the general pool of borrowers. This paper attempts to investigate whether lending patterns of foreign banks in urban regions of Indian states are indicative of such practices. Using credit data on urban regions of 21 states of India for 1999-2011, this paper finds empirical evidence of cream skimming by foreign banks in India.

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.

Causal Inference and Scientific Explanation in Economics

The debate on causality in the social sciences in general, and economics in particular, can hardly be regarded as settled. A vital point which seems to have escaped the debate is that causal laws and economic processes themselves can change, as economic institutions evolve. Thus the standard econometric methodology of verifying and refuting hypotheses from observed realisations of time series data is seriously at fault. What is needed is a meta-theory, which also encompasses the effects of institutional change on economic processes. The search for such a theory is likely to prove elusive, but as economics attempts to push beyond its conventional frontiers of postulating static theories it is very likely to lose much of its formal mathematical seductiveness and take on more the appearance of a narrative-descriptive science. Many may regard this as retrogression, but at least a few will welcome it as a step taking our subject closer to the vision of its founding fathers such as Smith, Malthus, Ricardo and Keynes.

Does Monetary Policy Have Differential State-Level Effects?

The paper examines whether monetary policy has similar effects across major states in the Indian polity. Impulse response functions from an estimated Structural Vector Auto Regression (SVAR) reveal two sets of states: a core of states that respond to monetary policy in a significant fashion vis-à-vis others whose response is less significant. The paper attempts to trace the reasons for the differential response of these two sets of states in terms of financial deepening and differential industry mix.

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