From its founding in 1986, IGIDR had hoped to work in the areasof money and finance. It was felt that IGIDR should havecomparative advantage in these areas as it is established byReserve Bank and is located in Mumbai, India’s financial capital.
Research in these areas was slow to start as good facultymembers are hard to find. However, we have now reached acritical mass. The process of economic reforms initiated in 1991also gave a boost to research in these areas as it raised newand intellectually challenging issues. Over the years IGIDR hasbuilt up an active and vigorous research proramme in theseareas and has accumulated a substantial body of work. Thefocus of our research efforts has been issues related to policymaking, on deepening our understanding of how the Indianeconomy and its markets function and on developing bettermethods and tools of analysis.
IGIDR has an active teaching programme. The programmeinvolves rigorous course work in theory and empirical methods.
The objective is to produce analysts who use sound theory andcareful empirical work to address policy issues. It has motivatedmany students to work in this areas and a number of Ph.D.
theses are underway. These new researchers and their humancapital is a valuable output of IGIDR.
This brochure briefly describes the work in the areas of monetaryeconomics and finance carried out at IGIDR – since itsbeginning. It is hoped that it will not only inform, but alsostimulate the interest of readers in these areas.
This brochure has been edited by Ashima Goyal, RaghbendraJha and Kirit Parikh.
Macroeconomists are attacked for having alternativeinterpretations of events. Jain philosophers long ago recognisedthat reality has many aspects. The manysideness of reality led tothe logical doctrine of naya or as Sarvapalli Radhakrishnandescribes it, “points of view”. A naya is a standpoint from whichstatements are made about things.
Macroeconomists are attacked for contradicting each other. Critics routinely said of the Jain position that it madecontradictory statements about a thing possible. But theadherents replied that contradictions are avoided only whenstatements are made from different point of view. Alternateperspectives complement each other even when they seeminglycontradict, and flesh out a full picture. And for that to emerge, itis essential to communicate.
A macroeconomist, Keynes once wrote, has to be an economist, a political philosopher, a sociologist, a mathematicianand an anthropologist rolled into one. Indeed the study ofmacroeconomic is challenging (and taxing) and there is bound tobe an abundance of views on any single issue. In studying themacroeconomics of a country in the kind of rapid transition thatIndia is going through, such an abundance of views is healthy.
The brochure which describes IGIDR research in macro- economics, money and finance illustrates this plurality ofperspectives. The picture that emerges is a hopeful one; India iscapable of rapid development, if policies are geared to releaseand enhance individual energies and build capabilities. Ourresearch points to these directions for policy.
Research at IGIDR uses modern economic theories and econometric tools to examine topics in monetary economics andfinance, from different perspectives, but avoids dogmaticideological positions. In the brochure the papers are classifiedunder sub topics, starting from macrotheory in general, andspecific to developing economies, to macromodels, monetarytransmission and open economy issues, reform, and sectoralstudies of finance: banking, stock markets and insurance. Eachsub-section starts with published papers and then goes on toworking papers, and work in progress including Ph.D.
The Jain system classified the nayas into seven logical categories or methods; starting with the metaphorical andgeneral going through the descriptive and ending in the specific.
The brochure starts with issues in macro theory, in particular withdeveloping a theoretical frame appropriate for a developingcountry. The theoretical cutting edge comes from a foundation inindividual decisions taken under constraints, and these decisionsmust be consistent in a general equilibrium over all the markets.
But to be relevant for a developing economy, issues ofdynamics, institutional structure and openness have to beembedded in the general equilibrium system. In the developmentliterature the idea of underdevelopment traps has a long history.
The metaphor of movement from a set of low to high growthequilibria is used to systematically explore the effects of foreigninflows, financial and industrial structure, and monetary andfiscal policies. Basic ideas that emerge from this approach arefirst, the importance of coordination; policies should reinforceeach other. Since the economy is a complex dynamic entity therange of complementary stimulatory policies need to beidentified. Second, even a small change, if it is in the rightdirection, can have large effects.
Theory has to be concretised in models and tested against the data. A number of models have been developed atIGIDR. They incorporate issues of finance, energy andenvironment, the sustainability of public debt, the role of foodprices, and test hypotheses about the monetary transmissionmechanism. An applied general equilibrium (AGE) model cangreatly improve the analysis of macro-policy and its distributionalimplications. IGIDR has been using routinely a real AGE modelfor agricultural policy analysis. An AGE model with a sectoralclassification that permits analysis of industrial policy is nowcompleted and work is in progress to include financial issues.
Much of the data work and some of the econometric work for theextension have been completed.
Time series methods have allowed great improvements in the testing of hypotheses such as: Does monetary policy affectoutput? If so, it is through credit availability or interest rates? Isinflation determined by demand shocks, including monetarypolicy, or are supply shocks more important? What is the degreeof endogeneity of money supply? How to quantify monetaryaggregates? What is the relative impact of fiscal vis-à-vismonetary policy? What does the term structure of interest ratestell us about the degree of integration of monetary and financial markets? Is credit in India demand determined or supplyconstrained? Models combine the descriptive with the theoretical. But there are many specific questions relating to the reforms. Muchof recent research and Ph.D. dissertations at IGIDR have beenon these questions. Liberalization has changed the contextwithin which macro-policy is conducted. The freedom ofGovernment to set monetary, exchange rate and fiscal policies issomewhat curtailed. These policies have to have certain internalconsistency without which their effectiveness is reduced. TheWashington consensus of balanced budget, money supply andexchange rate policy rules may not be the best policy in a poor,populous country. Investment can also have a beneficial impacton growth and inflation, and that calls for a more complex policyon interest rate and exchange rate. Perhaps a reduced emphasison monetary stabilization and less flexible nominal exchangerate to move beyond short-run unemployment inflation trade-offto the medium run relation between growth and inflation, may bebetter for us.
In the light of the reforms in the foreign exchange regime of India, and the recent volatility of the Rupee some questionsaddressed at IGIDR have been: How can the nominal exchangerate affect the trade balance of India? What signals do periodicpolicy induced changes in the exchange rate convey to thebusiness world? How is the foreign exchange market related toother financial markets, especially, regarding the transmission ofshocks from one market to the other? What is the long rundynamics of the real and nominal exchange rates? What is therelationship between exchange, interest and inflation rates? Is itpossible to design policies that will allow equilibrium exchangerates to be approached without excessive volatility? The East-Asian crisis has shown that the importance of a well-functioning financial sector under globalization.
Experience with financial reforms in different countries showsthat, countries with flexible nominal and low positive real rates ofinterests have been the most successful. Moreover, financialsector reforms have to be consistent with other policies anddomestic institutions. What is the nature of real-financial sectorinteractions? How does monetary policy interact with financialreforms? Should we have capital account convertibility? If so,how soon and what are the preconditions. Other importantquestions have come up in international finance. What should be the shape of the new international economic order? How shouldthe IMF quota for India be determined? Sectoral studies are more specific; their generality come from close links to the decisions of a more homogenous set ofagents. Some questions IGIDR has taken up are: What is theimpact of reform on financing decisions of Indian corporatefirms? Have finance constraints been relaxed? What is therelative efficiency of public or private banks? The progress of economic liberalisation in product markets in India of the 1990s, has been accompanied by aheightened analysis of the role of the State in the financialsector. Efficient and transparent financial markets are critical formobilizing and allocating domestic and foreign resources toaccelerate growth. A major goal for India's financial system todayis institutional development, leading to improved competition,improved prudential regulation, and lowered transactions costs.
These should add up to an improved ability by the financialsystem to play its role in resource allocation and risk reallocation.
IGIDR researchers have explored how markets behave for equity, currency and fixed income markets, and how publicpolicy can influence them. Issues arise in the political economyof regulatory reform. IGIDR researchers have worked on a betterunderstanding of how the banking system is making its transitionfrom a highly controlled and government--owned banking systemto one which is less directly regulated and which faces reducedentry barriers. A distinguishing feature of this research programis the application of modern concepts of industrial organisation tounderstanding the nature of competition in the banking sector.
Banking has traditionally been extremely important in India. However, a worldwide trend is ‘disintermediation', wherehouseholds and firms directly interact on financial marketsinstead of going through banks. Organised trading on financialmarkets, primarily in the area of equities, interest rates,exchange rates and commodities, has been a major focus ofresearch at IGIDR. IGIDR researchers have used time-seriesanalysis of prices to examine market efficiency, price discoveryand market microstructure to understand risk premia, time-varying risk and pricing of derivative securities such as options.
IGIDR researchers are the pioneers in the new area of financialderivatives in India, which are contracts for the `barter' of risk.
Insurance is similarly an area where Indian economic agents can benefit from a reallocation of risk. Insurance reforms have been high on the reforms agenda in India in recent years.
IGIDR researchers have applied economic principles to betterunderstand market structure, regulation, and tax incentives areexamined for the insurance sector in the context of the ongoingreforms.
These changes in the financial sector throw up questions about how firms rethink their financing patterns. In addition, wehave seen a new emphasis on the problems of `corporategovernance', which deals with conflicts of interest betweenshareholders and managers. These issues define the researchagenda in the area of corporate finance.
Finance is a unique area characterised by a lively interplay between economic theory, empirical research usinghigh quality data sets, and policy analysis. IGIDR researchersare at the forefront of research in India's financial sector, andapplications of this research into real--world settings.
Finally, IGIDR has an active teaching and Ph.D. program in this area. The faculty and research students involved havecrossed a critical mass; the excitement and ideas generated arereflected in the brochure.
Readers can find preliminary answers to questions they are interested in by looking up the abstracts on research,classified by topic. Fuller answers can be found in the papers.
We hope they will contribute to making the answers deeper andmore satisfactory by questioning the research and adding to it.
Readers are invited to get in touch with the concerned authors orthe Publications Division of IGIDR to get copies of papers thatthey may want to read at length.
I.1 Macro Theory and Developing Economy
I.1.1 Macro Theory
Raghbendra Jha, (1983), ‘Inflation and Economic Growth in
a Competitive Economy with Exhaustible Resources’,
Journal of Economic Behavior and Organization
, Vol.4,
No.1, (with U. Lachler)

Raghbendra Jha, (1988), ‘Essays in the Theory of Aggregate
, Commonwealth, New Delhi, xii+160 pages.
Theoretical modeling of the microeconomic foundations of
the Phillips curve and aggregate economic growth with

Raghbendra Jha, (1990), ‘The Fisher Equation Controversy:
A Reconciliation of Contradictory Results’, Southern
Economic Journal
, Vol. 57, No.1, (with L.H. Meyer and A.P.

Raghbendra Jha, (1990), ‘Hysteresis and the Natural Rate of
Unemployment- A Review Article’, Indian Economic Review,
Vol.25, No.2.
Raghbendra Jha, (1991), ‘Contemporary Macroeconomic
Theory and Policy’
, Wiley Eastern Ltd., New Delhi.,(416
pages) (Advanced text on macroeconmics)

Ashima Goyal, (1994), ‘Industrial Pricing and Growth
Fluctuations in the Indian Economy’, Indian Economic
, Vol.29, No.1.
Ashima Goyal, (1995), ‘The Simple Analytics of Supply,
Demand and Structural Adjustment’, Indian Economic
, Vol. 30, No.2, pp.37-56.
Ashima Goyal, (1996-97), ‘Sticky Relative Prices, Dynamics
and the Closure Debate’, Journal of Post Keynesian
, Vol.19, No.2, pp.195-222.
Raghbendra Jha, (1982), ‘A non-Walrasian Theory of
Unemployment and Growth’, in A.Chikan (ed.), Inventories
in the National Economy
, Amsterdam, North Holland.
Raghbendra Jha, (1986), ‘Search Reinforces Inflation’, in
S.Biswas (ed.), Proceedings of the UGC Congress on
Stochastic Processes
, Academic Publications, New Delhi.
Ashima Goyal, (1998), ‘Do Foreign Inflows Let Expectations
Dominate History’, Journal of Foreign Exchange and
International Finance
, Vol.10, Oct-Dec., forthcoming.
I.1.2 Developing Economy Macro Theory
Hiren Sarkar and Manoj Panda, (1986), ‘Quantity-Price-
Money Interactions in a CGE Model with Applications to
Fiscal Policy’, Margin
. April, 1986.
effect through lower moneysupply and a price increasing effect through raising costs.
Consequently, the net price expansionary fiscal policyincreases output but pushed up increase case, which did notinvolve any cost increase.
consider money. The model alsoshowed that resource Ashima Goyal, (1992), ‘Demand, Supply and Savings
Constraints in Indian Economy’, Economic and Political
, April 25, pp. 893-899.
Raghbendra Jha, (1994), ‘Macroeconomics for Developing
, Routledge Publishers, (ix + 321 pages) (senior
undergraduate and graduate level text on macro problems
peculiar to developing countries). Published in hardcover
and paperback simultaneously from London and New York.

Ashima Goyal, (1994), ‘Developing Economy
Macroeconomics: Fresh Perspectives’, Economic and
Political Weekly
, November 26, pp 3041-3052.
Ashima Goyal, ‘Developing Economy Macroeconomics:
Fresh Perspectives’
Allied Publishers, New Delhi,

Ashima Goyal, (1997), ‘Savings: A Clarificatory Note’,
Economic and Political Weekly
, September 13, Vol. 32, 37,
pp 2362-2364.

Raghbendra Jha, (1998), ‘The Challenge of Macroeconomic
Management after the 1998-99 Union Budget’, invited by
Economic and Political Weekly

Raghbendra Jha and Mridhul Saggar, (1998), ‘IMF Quota
Structures and the Developing Countries’
, Report to
Development Research Group, Reserve Bank of India
, (270
pages). Detailed examination of the rationale for the quota
structures of the developing countries with the IMF and
suggestions for reform.

1.2 Macro Models
Tirthankar Roy, (1994), ‘Real and financial flows in the
Indian economy, 1970 to 1990’ (with K. Sen), International
Journal of Development Banking
, January-July, 1994.
Tirthankar Roy, (1991), ‘Changes in savings-rate and its
implications for growth’ (with K. Sen), Economic and
Political Weekly
, April 1991.
Ashima Goyal, (1994), ‘Growth Dynamics: in a General
Equilibrium Macroeconomic Model for India’, Journal of
Policy Modeling
, Vol.16, No.3.
savings to finance the investmentwould become available.
Raghbendra Jha, (1995), ‘Patterns of Causality between
Public Expenditure and Growth of Money and National
Income in India’, Indian Journal of Applied Economics
, Vol.
4, No.4. (with A.K. Seth)

Ashima Goyal, (1996), ‘Savings in India: When Data are
doubted can Theory help?’ Economic and Political Weekly
May 25, Vol. 31, 21, pp.1257-1264.

Raghbendra Jha, (1997), ‘The Determinants of the Price of
Food in India’, Indian Journal of Applied Economics
, Vol. 6,

Tirthankar Roy, Kunal Sen, R. Krishnan and A. Mundlay.
(1997), ‘A flow of funds model of the Indian economy and its
implications’, Journal of Policy Modeling
Raghbendra Jha, ‘Some Rudimentary Macroeconomics of
the Budgetary Deficit and Debt’, in D. Nachane and A.
Vasudevan (eds.), Fetschrift for Prof. Brahmananda

Sudipta Dutta Roy and Gangadhar Darbha, ‘Dynamics of
Money, Output & Price Interaction: Some Indian Evidence,’
Working paper

adequate ‘supply side’ measuresmay not be able to serve the Ganesh Kumar A., Gangadhar Darbha and Parikh, K. S.,
Financial General Equilibrium Model for India’,
project, work in progress.

Equilibrium for the economy isthen specified as the state when would consist of three blocks:The real sectors block, the financial sectors of the economyare modelled by tracking the flow “Impacts of a Hike in the Administered Prices of Petroleum
Products: Analysis Using an Applied General Equilibrium
Model for India”, working paper.

Sudipta Dutta Roy and Gangadhar Darbha, ‘Testing for Long
Run Stability in the Money Demand Function’ and ‘Periodic
Structures and Testing for Unit Roots: some Empirical
Evidence’ Work in Progress

Gangadhar Darbha, ‘Are Higher Levels of Inflation Less
Predictable? Evidence on Friedman’s Hypothesis’ Work in

I.3 Monetary Transmission Mechanism
I.3.1 Inflation
Ashima Goyal, (1996), ‘Industrial Pricing and Growth
Fluctuations: Some Tests’, Economic and Political Weekly
Nov.30, Vol. 31, No. 48 and 19, pp M-54-M-62.

Gokarn S., (1997), ‘Economic Reforms and Relative Price
Movements in India: A ‘Supply Shock’ Approach’,
Journal of
International Trade and Economic Development
, Vol.6, No.2,

four regimes that governed thecountry between 1982 and 1995, The last of these, the governmentof Mr. Narasimha Rao, clearly the skewness and the area of thetails of the distribution. Once this not provide the kind of favourablesupply shocks that one might movements in the standarddeviation or skewness can have other things, raising thepossibility that the incomplete relationship between thesevariables for Indian data. It then Ashima Goyal, (1997), “Inflation, Exchange and Interest
Rates; A Macroeconomic “Rashomon””, in the India
Development Report
, ed. by Kirit S. Parikh, IGIDR and
Oxford University Press.

Gokarn S., (1995b), ‘Inflation in India 1982-1994: A
Multivariate Analysis’, working paper, IGIDR

Subir Gokarn, ‘Core inflation in India’, Work in Progress
factors, which would require adifferent set of responses.
I.3.2 Monetary Aggregates, Monetary Policy and
Interest Rates
Ashima Goyal and Shridhar Dash, (1996), ‘Is Broad money
Endogenous in India? Hypotheses and Some Evidence’, DP

R. Krishnan (1998), ‘Monetary Aggregates’, Work in

R. Krishnan, (1998), ‘Monetary versus Fiscal Policy’, Work in

R. Krishnan, (1998), ‘Term Structure of Interest Rates’, Work
in Progress

Ashima Goyal and Shridhar Dash, (1998), ‘Real-external-
financial sector interaction under liberalization in an open
developing economy’, (working paper)

I.3.3 Credit
Gangadhar Darbha, “Role of Capital Market Imperfections in
Monetary Transmission Mechanism – some Indian
Evidence” Ph.D. submitted, Indira Gandhi Institute of
Development Research, Mumbai.

consumption in every period willbe effectively limited by and phases associated with lowgrowth in credit than otherwise, 2. Inventory Investment, InternalFinance and Business Cycle: of bank lending channel in themonetary transmission sense, a significant proportion ofvariation in economic activity; (2) The primary objective is topresent some empirical evidence positively correlated with changesin sales both at the aggregate determining the fluctuations ineconomic activity at the sales and output highlighting therole of inventories in generating / Our goal is to provide someempirical sense of the importance corporate borrowing and savingsaffect corporate inventory inventory investment and output.
After examining the cyclical variation in future inventories; (5)there seems to be a significant Structural Vector Autoregression(SVAR) model of aggregate coupled with the earlier findings,suggest that financial factors compute the measures ofImpulse Response Function (IRF) (6) the correlation betweeninnovations in corporate sales shock to one variable, to the restof the variables, in the system and inventory holdings areasymmetric over positive and Sagar V. Koparkar, Ph.D.: ‘Issues in Bank Credit, Asset
Securitization and Financing Infrastructure in India’ (work in

economy. The thesis deals withthese issues, suggests relevant simultaneous equationframework, it was found that due to its wide base can playa major role in financing I.4 Liberalization and Financial Sector Reforms
Tirthankar Roy, (1993), ‘Money Supply and Asset-Choice in
Interwar India’, Indian Economic and Social History Review
Vol. 30, No.3, April-June.

Tirthankar Roy, (1994), ‘The Depression in India’, Discussion
Paper, Indira Gandhi Institute of Development Research,

Tirthankar Roy, (1995), ‘Price Movements in Early Twentieth
Century India’, Economic History Review
, February.
specific banking histories arerequired. Not institutional Ashima Goyal, (1995), ‘Putting Structure on Structural
Adjustment’, Economic and Political Weekly
, May 6-13, pp

Gokarn, S., (1996), ‘Indian Capital Market Reforms 1992-
1996: An Assessment’, Economic and Political Weekly
, Vol.
31, No. 15, pp. 956-961

and departments. Afterconsolidating its regulatory so the final outcome is essentiallya delicate balance between often according to which particularsource it addresses. The overall Gokarn, S., (1995a), ‘Regulation of the Indian Stock Market:
An Assessment of Recent Reforms’
, working paper, IGIDR
(Paper written as part of an ICEG sponsored project on
financial sector reforms in India)

Ashima Goyal, (1997), ‘Financial Reforms: Why Interest
Rates Must be Kept Low’ International Journal of
Development Banking
, Vol.15, No.2, July-Dec.
Ashima Goyal, (1997), ‘Foreign Capital and Economic
Liberalization: Cooperation or Competition?’ in Kousar J.
Azam (ed.), Economic Liberalization in India: Implications
for Indo-US Relations
, American Studies Research Centre,
Delhi: Delta Publishing House.

Kunal Sen and Rajendra R. Vaidya, (1997) ‘The Process of
Financial Liberalisation in
India’, Oxford University Press,

Agrawal Pradeep, Regulation and Reform of the Financial
Sector in India
: An Analysis of the Underlying Incentives
Forthcoming in S. Kahkonen and T. Lanyi (editors),
“Institutions, Incentives, and Economic Reforms in India
Sage Publications, Delhi.

Pradeep Agrawal, “ Macroeconomic Environment, Savings,
Investment and the Financial Sector” in Policy Regimes and
Industrial Competitiveness
: A Comparative study of India
and South Asia
, Pradeep Agrawal et.al. (Ed.) Forthcoming
from Macmillan, UK.

Other factors, which mightexplain the high savings rate, sectors developed better incountries, which had a Ashima Goyal, (1996), “Consistency in Financial Sector
Reform” in ICEG/ICRIER sponsored project on ‘Financial
sector reforms in India’
Report presented in February 1996.
underdeveloped. This, abetted bypaucity in their variety and 2. Markets in transition oftenhave special problems. Excess more traditional assets. Thereforea complementary set of four such as FIIs-a carefully phasedcapital gains tax can help. Tighter prudential norms to guard againstmalfunction; targeting a small investment and financial savings,and raise the supply of financial Agrawal Pradeep, (1995), ‘Financial Sector Reforms in South
Asia: Issues and Evidence’, Working Paper

I.5 Exchange Rates and International Finance
Raghbendra Jha, (1988), ‘The International Economic Order’,
Commonwealth, New Delhi, x+239 pages.

Ashima Goyal, (1993), ‘The Role of Foreign Aid and the
Foreign Exchange Constraint in Growth: Some Extensions’,
Journal of Foreign Exchange and International Finance
Vol.7, No.1, pp.30-43.

expected negative effect offoreign inflows on the savings Ashima Goyal, (1997), ‘Foreign Capital Inflows, Real
Exchange and Interest Rates: an Analytical Framework’,
Journal of Foreign Exchange and International Finance
Vol.9, No.3, pp.215-232.

Basudeb Guha-Khasnobis, ‘Devaluation’, Keio Economic
vol. 34, No.1.
relative price in the right direction.
Basudeb Guha-Khasnobis, (1997), ‘Devaluation and
Competitiveness: Evidence from the Tea and Textiles
Industries’, Journal of Economic Integration
theoretical conclusion thatdevaluation can indeed improve Basudeb Guha-Khasnobis, (1998), ‘Sensitivity of the Rupee-
Dollar Exchange Rate: A VAR Analysis’, forthcoming in
Journal of Foreign Exchange and International Finance
Basudeb Guha-Khasnobis and Shridhar K. Dash, (1998),
‘Risk Premium in the Indian Forex Market’ International
Journal of Development Banking
, 16, 1, 19-30.
Government of India has recentlyannounced its intention to delink reliable data on other exchangerates, the study is restricted only Basudeb Guha-Khasnobis, ‘The Dynamics of the Real and
Nominal Exchange Rates of India’ (jointly with Rajiv Ranjan),
Journal of Economic Integration
, forthcoming.
trade partners, viz ., the US, UK, Goyal and Shridhar Dash, ‘Arbitrage: an
Explanation for the South-east Asian Crisis and Indian
immunity’, Economic and Political Weekly
, vol.33, no. 31,
2098-2104, August 1.

Ashima Goyal, (1995), ‘Foreign Inflows: Evil, Blessing or
Opportunity?’ in K. S. Parikh (ed.), Mid-Year Review of the
Indian Economy, 1994-95
, Konark Publishers Pvt. Ltd., New

public investment in desirabledirections, while maintaining Ashima Goyal, (1998), ‘Transitional Exchange Rate Policy in
a Low Per Capita Income Country’ DP No.147.

A. Ganesh-Kumar and Rajendra R. Vaidya (with Kunal Sen,
Massey University, New Zealand), “International Trade,
Competitiveness and Finance: The Developing Countries
Experience – Case study for India
” Cross-country project
(Argentina, Uruguay, Brazil, South Africa, Tunisia, India,
Indonesia and Philippines) sponsored by International
Development Research Centre (IDRC), Canada. Work in

Ashima Goyal, (1998), ‘Signalling and the Acceptability of
Foreign Direct Investment’ Working Paper

Ashima Goyal, (1998), ‘The Impact of Structure and
Openness on the Causal Ordering of Interest, Inflation and
Exchange Rates for India’ Working Paper

II.1 Corporate Finance
Subrata Sarkar and Jayati Sarkar, ‘Large Shareholder
Activism in Corporate Governance in Developing Countries:
Evidence from India,’ working paper

Saumitra N. Bhaduri, Ph.D.: ‘Patterns and Determinants of
Capital Structure: A Study of the Indian Corporate Sector’,
synopsis submitted.

a relatively constrained to arelatively unconstrained choice were raising significantresources from equity (c). Is there any evidence thatliberalization has succeeded in from existing shareholder’sviewpoint, as fresh equity bank oriented debtinstruments in the post “Pecking Order Hypothesis”, that II.2 Banking
Jayati Sarkar, (1998), “Does ownership always matter?
Evidence from the Indian banking industry,” (with Subrata
Sarkar and Sumon Bhaumik), Journal of Comparative
Jayati Sarkar, “Structure, conduct and performance of the
Indian banking industry”, forthcoming
in S. Gokarn, A. Sen
and R. Vaidya (Eds.) The Structure of Indian Industry
Oxford University Press, New Delhi.

Jayati Sarkar, “India’s Banking Sector: Current Status,
Emerging Challenges and Policy Imperatives in a Globalised
Environment”, forthcoming
in untitled edited volume to be
published by World Bank and Oxford University Press.

Jayati Sarkar, “Deregulation and the Limits to Banking
Market Competition: Some Insights from India,” (with
Sumon Bhaumik), forthcoming
in International Journal of
Development Banking,
July - December 1998.
Gokarn, S. (1994), ‘Performance Variability of Banks in India:
Productivity, Regulation or Management?’ working paper,

Subrata Sarkar, (1998), “Deregulation, Ownership Structure,
and Productivity Growth: Evidence from Indian Banks”,
(jointly with Subal C. Kumbhakar). Working Paper

through distortions in input prices.
relative to labor throughout theperiod, though the extent of over II.3 Financial Markets
II.3.1 Efficiency
Ajay Shah and Susan Thomas, (1998), ‘Strengthen
institutions for domestic markets’, in ‘Perspectives on
International Financial liberalisation’
, UNDP Office of
Development Studies, April 1998.

Shridhar Kumar Dash, (1998), ‘Efficiency of Indian stock
Market: Evidence from Long Memory Test,’
The Indian
Journal of Economics,
Shridhar Kumar Dash, (1998), “Efficiency of Indian Foreign
Exchange Market,” Journal of Foreign Exchange and
International Finance
, Vol. XII, No. 1, pp. 35-44.
Ajay Shah, (1995), ‘The impact of speculation upon volatility
and market efficiency: The badla experience on the BSE’,
working paper.

Ajay Shah, (1995), ‘The tale of one market inefficiency:
abnormal returns around GDR issues by Indian companies’
working paper.

Susan Thomas, (1998), ‘Long run dependence on the Indian
equity market’, working Paper.

Susan Thomas, (1998), ‘Volatility models for the Indian
stock market returns’, working Paper.

Susan Thomas, (1998), ‘Volatility in India’s financial
markets: Case studies in equity index, call money and
foreign exchange’, working Paper.

Raghbendra Jha, Hari K. Nagarajan and K.
Chandrashekhar), Integration and Price Discovery in Indian

Stock Markets, (for Price Waterhouse and Company).
Analysis of the short-run and long run behavior of prices of
stocks in national and regional stock markets in India.

Rajendra R. Rane, 1997, “Risk, returns, market efficiency
and anomalies: A study of cross sectional and calendar
effects in Bombay stock exchange (1964-95)”, Ph.D.

unfailing recurrence of "risk" asan explanation in all our studies, Indian market and itssophistication to correctly our understanding of the Indianmarkets. We conclude that Shridhar Kumar Dash, (1998), ‘Indian Asset Markets and
their Interlinkage: An Empirical Analysis’, Ph.D. submitted.

market due to movement fromdual to unified exchange rate decisions. Agencies like SEBI(stock market regulator) and RBI (regulator of foreign exchangemarket, money market and results suggest absence of long-run relationship amongst asset II.3.2 Risk: Measurement, Forecasting and
Ajay Shah, (1997), ‘Black, Merton and Scholes: Their work
and its consequences’, Economic and Political Weekly
December, Vol. XXXII, No.52, p3337—3342.

Susan Thomas (Ed), (1998), ‘Derivatives markets in India’,
Tata McGraw Hill.

II.3.3 Market Microstructure
Waghmare, T. & S. Gokarn (forthcoming), ‘Entry Conditions
and Price Behaviour of Initial Public Offerings: A Study of
the Indian Primary Market 1990 to 1995’ Applied Financial

funds through the market. Anumber of theoretical arguments steeply, and along with this, theextent of underpricing also Ajay Shah and Susan Thomas, (1997), ‘Securities Markets’
Chapter 10, p167-192, in Kirit S. Parikh (ed.), ‘India
Development Report – 1997’,
Oxford University Press.
Ajay Shah, (1995),‘The Indian IPO Market: Empirical Facts’,
working paper, June 1995.
Ajay Shah, (1998), ‘The evolution of the Indian equity
market: 1992-1998’, working paper, July.

Ajay Shah, (1998), ‘Improved methods for obtaining
information from dealer markets’, working paper.

to describe a specific marketmicrostructure interpretation for II.3.4 Regulation
Subir Gokarn, ‘Structural Change and Regulatory Response
in the Indian Stock Market’, Work in Progress.

II.3.5 New Instruments
Ajay Shah, (1998), ‘Securities Markets’, Chapter 1 (p1-10) in
Bibek Debroy and Parth J. Shah (eds.), ‘Agenda for Change’
published by Rajiv Gandhi Institute for Contemporary
Studies, April 1998.

Ajay Shah and Susan Thomas, (1996), ‘How automation and
competition changed the Bombay Stock Exchange’, working

Ajay Shah and Susan Thomas, (1997), ‘Developing the
Indian Capital Market’
, working paper.
Ajay Shah and Susan Thomas, (1998), ‘Market
microstructure considerations in index construction’,
working paper.

India’s first index futures market.
Ajay Shah, (1996), ‘Minimum Asset-based Tax: A Critique’,
Economic and Political Weekly
, vol. XXI #30, pp 2046--2048.
II.4 Insurance
Rajeev Ahuja, Ph.D. ‘Essays on Insurance Markets’ , work in

Ahuja R and Ranade A., (1998), ‘Life Insurance in India:
Emerging Issues’
, working paper.
Ranade A. and Ahuja R., (1998), ‘A Note on Insurance Market
Structure with Adverse Selection’
, working paper, IGIDR,

Ahuja R., (1997), ‘On Public Provision of Insurance’, working

Ahuja R., (1998), ‘Impact of Tax Deductibility of Insurance
Premium’, working paper.

Research affects policy in many ways. New insights open upnew options and clarify choices. Research results, however,have to be communicated. It is important to publish it in refereedjournals so that its soundness can be assessed by academicpeers. Yet, it should also be disseminated to widen audience ofgeneral public. An informed public opinion is often aprecondition for policy reforms. Writing popular articles innewspapers and advocacy work can, thus, contribute to policyreforms.
However, policy making cannot wait till research has settled all answers. One needs to use the available knowledgeto illuminate alternatives. Institute researchers have playedimportant role here through their involvement in policy work.
Kirit Parikh was a member of the Capital Account Convertibility Committee (popularly known as Committee) and actively participated in its work. A backgroundpaper was written for the Committee by Kirit Parikh, Ajay Shahand Susan Thomas. The Committee’s report, submitted in April1997, before the East Asian crisis, advocated a phasedapproach to full convertibility and laid down the variouspreconditions. When viewed with the hindsight of East Asianexperience, the Committee’s preconditions look adequate toavoid such a crisis.
At the request of Dr. C. Rangarajan, then Governor, RBI, and Mr. M.R. Sivaraman, India’s Executive Director in the IMF,Raghbendra Jha carried out (along with Mridul Saggar also ofIGIDR) a study of IMF quota structures in anticipation of the 12thQuota Review of the IMF. The study details quota formulae (alternative to those used by the IMF) which may be moreconsistent with IMF objectives and yet improve India’s quotaposition were detailed. Analysis of possible coalition formationswhich may improve India’s voting power within the Fund wasalso carried out.
Liquidity considerations led to the principles of creation of the National Stock Exchange (NSE) index, the NSE-50 (Nifty).
By explicitly taking the structure of the market into account,ShahThomas98 devise a_methodology_to use liquidity as theprimary consideration in ShahThomas98, "Market microstructureconsiderations in index construction".
Derivatives trading requires a large amount of institution design and building to be a useful and safe tool for investment.
Ajay Shah was a member of the L. C. Gupta committee whichframed the rules and regulations on fair competition and riskmanagement for derivatives trading.
The L. C. Gupta committee has stipulated that every person who deals with derivatives has to be certified as having aminimum level of knowledge about derivatives. Kirit Parikh, AjayShah and Susan Thomas are on the committees that formulatepolicy and the curriculum for this certification endeavour, whichhas had 1200 people take the test since June 1998.
Ajay Shah also sits on committees at the National Securities Clearing Corporation Ltd., which controls andmanages the risk of clearing and settlement for the NSE andtoday the Over The Counter Exchange of India (OTCEI) and theNational Securities Depository Ltd., which is India's firstdepository of physical shares. He is also a member on the boardof the OTCEI.
An endeavour to lower the informational barriers to prices at the short term has been the creation of the NSEWholesale Debt Market (NSE-WDM) Mibid and Mibor (Mumbaiinterbank bid and offer) by polling dealers and employingstatistical tools to optimally remove the outliers, as outlined inShah98, "Improved methods for obtaining information fromdistributed dealer markets".
Many faculty members write regularly in newspapers.
Subir Gokarn
• From recession to stagflation and back, Business Standard, • Viagra for the SENSEX, Business Standard, June 29, 1998• In front of vs. behind the counter, Business Standard, May • Squeezing out the lemons, Business Standard, May 4, 1998• How to control corporates, Business Standard, March 23, • More lessons from East Asia, Business Standard, February • Going, going, gone, Business Standard, January 26, 1998• To bailout or not to bailout, Business Standard, January 12, • A tale of two assets, Business Standard, December 1, 1997• CAC vs. CRB, Business Standard, June 16, 1997• Preserving the NBFC edifice, Business Standard, June 2, • Roller coasting with interest rates, Business Standard, May • Sovereignty and solvency, Business Standard, March 24, • A Rethink on convertibility, Business Standard, March 10, • A context for the budget, Business Standard, February 24, • Borrow now, tax later, Business Standard, January 13, 1997• The hibernating bear, Business Standard, December 16, • Beating a retreat, Business Standard, December 2, 1996• Minding others’ business, Business Standard, November 18, • Walking before flying, Business Standard, November 4, • Takeover code - the broader context, Business Standard, • Should equity be rated? (With Tushar Waghmare) Financial • Who’s afraid of takeovers? The Economic Times, August 31, • Any reform process must neutralize the incentive for fraud, Financial Express, October 30, 1992 Ashima Goyal
1. ‘Budget that did it?’ The Business Standard, 13th March 2. ‘What are the Fundamentals?’ The Business Standard, 12th 3. ‘Pragmatism over Ideology’, The Business Standard, 31st 4. ‘With a Little Help from my Foes’, The Business Standard, 5. ‘How to Have Growth Without Inflation’, The Business Standard, 25th December 1997.
6. ‘Finding a Sustainable Value for the Rupee’, The Business 7. ‘Kautilya versus Machiavelli’, The Business Standard, 6th 8. ‘Did the Budget Budge?’ The Business Standard, 19th June 9. ‘No need for Interest Rates to Rise’, The Business Standard, Rajeev Ahuja and Ajit Ranade
1. 1. ‘Insuring Against Failure: A Quiz on Insurance Sector Liberalisation’, Economic Times, October 11, 1996 2. ‘Insurance Regulatory Authority: Bloodhound or Watchdog’, 3. ‘Motor Vehicle Insurance: Heading for a disaster, Full Throttle’, Economic Times, March 27, 1997.
4. ‘Insurance Thrives at Tax Payers Expense’, Times of India, 5. ‘Bridling Competition in Insurance’, Times of India, IV. FACULTY WITH INTERESTS IN MONEY
Teaching in the Money and Finance area occurs at two levels:Compulsory courses and optional courses.
Compulsory Courses:
At present there are two compulsory courses: Macroeconomics Iand Macroeconomics II.
Macroeconomics I concentrates on the determination of key macro variables such as real GDP, the rate ofunemployment, nominal and real rates of interest and the rate ofinflation in a closed economy. When the analysis is extended tothe open economy the exchange rate and factors determiningthe balance of payments are also added to this list. Many policyissues are also taken up. Veena Mishra is currently teaching thiscourse.
Macroeconomics II discusses various models of economic growth and fluctuations. Prominent among these is theexogenous and endogenous theories of economic growth, thehuman capital model and models of technical progress andgrowth as well as models of real business cycles. Also taught arecontemporary issues of relevance to the conduct of monetarypolicy such as dynamic inconsistency of monetary policy, therole of seignorage and that of asymmetric information in thepropagation of macroeconomic shocks. Modern theories ofunemployment such as the shirking model, implicit contractmodel and the insider-outsider model are included. RaghbendraJha is currently teaching this course.
Students intending to work toward a Ph.D. typically take a Comprehensive Examination in Macroeconomics (along withthose in Microeconomics and Econometrics).
Optional courses in the Money and Finance Area have varied over the years depending upon the interests of teachers.
In recent years the following courses have been offered: • Macro Models of Development (taught by Ashima Goyal).
• Monetary Economics (taught by Veena Mishra).
• Applied General Equilibrium Analysis (taught by Kirit Parikh, • Corporate Finance (taught by Subir Gokarn)• Financial Economics/Econometrics (taught by Ajay Shah Several Students are writing their Ph.D. and M.Phil. dissertationsin the area of money and finance. A list of such students, alongwith their thesis topics and name(s) of supervisor(s) is attachedbelow.
Thesis Topic
Supervisor/ Guide
Committee Member
1991-92 Batch
“Efficiency of the Stock Market” submitted “Modelling Exchange Rate Dynamics in the Indian Economy” 1992-93 Batch
“Macro-economic Consequences of Financial Liberalisation – An Kirit Parikh Integrated Applied General Equilibrium Model for India” “Role of Credit in Monetary Transmission” “Trade Effects of Exchange Rate Uncertainty: A Case Study of 1993-94 Batch
“Indian Asset Markets and their Interlinkages: Some Empirical Ashima Goyal “Market Microstructure & Performance: A Study of Indian Stock Subir Gokarn “The Indian Credit Rating Industry : An Evaluation” Thesis Topic
Supervisor/ Guide
Committee Member
1994-95 Batch
“In Defense of Public Provision of Insurance” “Determinants of Capital Structure Choice: A Study of Indian Subir Gokarn “Estimating a Structural Model of Bank Credit” 1995-96 Batch
“Issues in Equilibrium Real Exchange Rate and its Relevance to Raghbendra Jha 1996-97 Batch
“Saving Aggregates & Demand for Financial Assets in India: Raghbendra Jha “Endogeneity Issues of the Money Supply Process” “Measuring Value-at-Risk for Indian Equity Portfolios” Contents
Foreword .1
Preface .3
I.1 Macro Theory and Developing Economy Macroeconomics.8 I.1.2 Developing Economy Macro Theory. 12 I.3.2 Monetary Aggregates, Monetary Policy and Interest Rates . 26 I.4 Liberalization and Financial Sector Reforms . 31 I.5 Exchange Rates and International Finance. 38 II. FINANCE . 47
II.3.2 Risk: Measurement, Forecasting and Management . 58 III. POLICY INVOLVEMENT AND DISSEMINATION. 65

Source: http://www.igidr.ac.in/money/pastmfc/igibrochure.pdf


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