This paper applies the autoregressive distributed lag approach to cointegration analysis in estimating the 'virtual exchange rate' (VER) in India. The VER would have prevailed if the unconstrained import demand were equal to the constraint imposed due to foreign exchange rationing and the VER is used to approximate the 'price' of rationed foreign exchange reserves. We highlight the shortcomings of the existing literature in approximating equilibrium exchange rates in a less developed country such as India and propose the VER approach for equilibrium rates, which uses information from an estimated structural model. In this relationship, black market real exchange rate (E U ) is a dependent variable and real official exchange rates (E O ), the ratio of the foreign (r*) to the domestic (r) interest rate (I), and official forex reserves (Q) are explanatory variables. In our estimation, the VERs are higher than E O by about 10% in the short-run and 16% in the long-run.
We investigate whether government budget deficits and real interest rates have a longrun relationship with the current account of the balance of payments in 23 OECD countries. Such an investigation is of interest since large and persistent budget deficits may impose strains on the foreign exchange markets and are considered by some to be one of the main causes of crises in international financial markets. We permit regime shifts in the cointegration analysis, which extends empirical modelling relative to existing studies. We find that the admission of regime shifts substantially influences the empirical conclusions: we find a long run relationship between budget deficits, real interest rate and current account deficit in 13 out of 23 countries whereas the number of countries with apparent long-run relationships is dramatically reduced when regime shifts are not permitted. We argue that, when structural breaks are taken into account, it seems to be the countries with a more extensive financial infrastructure in which the twin deficits are less likely to be conjoined.
The financial sector has always played a central role in economic development, but analysis of its precise role has been hampered by the emphasis on 'real' factors in the main stream of economic thought and the static nature of financial theory. Empirical studies confirm the importance of finance to economic development, but are indecisive on the efficaciousness of the widely advocated policies associated with financial liberalisation. To be successful, strategies for financial liberalisation must deal with problems generated by asymmetric information and have policies to promote competition, the disclosure of information and the maintenance of governmental integrity.
The aim of this study is to estimate the demand for real broad (M2) money in Bangladesh using the most recently developed autoregressive distributed lag approach to cointegration analyses. The empirical results show that there is a unique cointegrated and stable long-run relationship among real per capita broad money demand, real per capita income, domestic interest rates and unofficial exchange rate (UM) premiums which act as a surrogate for foreign interest rates. With money as the dependent variable, the results show that the income and interest elasticities are positive while the UM premium elasticity is negative. These results suggest that distortions in the financial and foreign exchange markets should be reduced in order to increase financial saving or monetary accumulation. Our results also reveal that the demand for money in Bangladesh is stable despite the changes in financial and exchange rate policies between 1975 and 1995.
This paper empirically explores the joint impact of financial and trade liberalisation on economic growth in Bangladesh using various time series techniques, endogenous growth theory and annual data from 1975-95. Our empirical results are in accordance with the predictions of endogenous growth theory that both financial and trade liberalisation, along with investment in human capital enhance economic growth, suggesting the case for liberalisation of both the financial and trade sectors and suggesting that government initiatives in education policy may expedite economic growth. Results are robust across methodologies. [E52, F43, O11, O53]
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