Employing Factor Augmented Vector Autoregression (FAVAR) model where factors are obtained using the principal component analysis (PCA) and the parameters of the model are estimated using Vector Autoregression framework, we analyse how changes in monetary policy variables impact inflation, output, money supply, and the financial sector in India. Our results for the period 2001:04 to 2016:03 show that the benchmark FAVAR model showed more reliable results than baseline VAR model. Benchmark FAVAR model shows the existence of weak ‘liquidity puzzle’ in India. The impulse responses from the FAVAR approach reveal that monetary policy is more efficient in explaining the variations in inflation rather than stimulating output indicating its effectiveness in attaining the objective of price stability.
Using sectoral as well as subsectoral foreign direct investments (FDI) data, we explore the determinants of FDI in services at both sectoral and sub‐sector levels of 25 emerging economies for the period 1999–2016. We employ a bootstrap‐based bias‐corrected fixed effects model to analyze whether FDI's determinants vary within the service sector. Our results show that market size, market potential, natural resources endowments, and agglomeration effects are positively associated with the FDI in services and its subsectoral levels. The sectoral disaggregated analysis shows that the variables that attract FDI in services do not vary much from financial to nonfinancial services. This study suggests that there is no need for a separate theory for explaining FDI determinants in financial and nonfinancial services though some modifications are to be made. Before making modifications, we have to consider the salient features of service sector FDI, such as intangibility, inseparability, perishability, heterogeneity, and commercial presence.
We employ panel Vector Error Correction Models (VECM) and cointegration framework to identify the existence and direction of the causal association between foreign direct investment (FDI) in financial services and financial development for 26 emerging economies for the period 2003–2015. Our results show that there exists a long‐run cointegrating relationship between financial development and FDI in financial services after incorporating the extent of heterogeneity among emerging economies. We find long run unidirectional causality from financial development to financial services FDI. Using fully modified OLS (FMOLS) estimation, we estimate the long run elasticities between financial services FDI and financial development. Our results show that financial development has a positive and significant impact on FDI in financial services, which implies that a country with well‐developed financial markets tend to attract larger amounts of FDI in financial services.
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