In the Helpman et al. model (HMY), costs of transportation shape the decisions of firms about serving foreign customers by exporting or by doing FDI. The analysis of FDI in IT‐related services presents a challenge given the low cost of transportation through telecom networks. This study extends the HMY model by considering uncertainty in product quality. This reverses the ordering of the firms that do FDI. These predictions are tested using Indian data in two industries: chemicals and software. Chemicals represents a conventional setting, and we find that the most productive firms invest abroad. However, in the case of the software industry, where there is uncertainty about product quality and the transportation cost is low, the results are consistent with the predictions of the extended model: less productive firms invest abroad.

No abstract

No abstract

No abstract

No abstract

This paper analyses the extent to which financial integration impacts the manner in which terms of trade affect business cycles in emerging economies.Using a small open economy model, we show that as capital account openness increases in an economy that faces trade shocks, business cycle volatility reduces. For an economy with limited financial openness, and a relatively open trade account, a model with exogenous terms of trade shocks is able to replicate the features of the business cycle.

No abstract

Average food inflation in India during the period 2006-2013 was one of the highest among emerging market economies, and nearly double the inflation witnessed in India during the previous decade. An often cited hypothesis argues that the surge in food inflation during this period was driven by rising demand for high-value food products due to higher per capita income and diversification of Indian diets. In this paper we test the validity of this hypothesis by estimating the expenditure elasticity and then calculating the aggregate demand using data from household survey conducted by the National Sample Survey Organisation (NSSO). Our results show that in recent years estimated demand has exceeded supply of all major food products, barring fruits. Moreover, empirical estimates indicate that the demand supply gap is an important driver of rise in food prices, along with other factors such as minimum support prices, global prices, fiscal deficit and agricultural wages. JEL Classification: E31; E37 and Q11