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Comments on Eswar Prasad IPF 15.07.08

Comments on Eswar Prasad IPF 15.07.08. Partha Sen Delhi School of Economics. Prasad’s Paper. In addition to the usual arguments emphasizes institution building role of convertibility Conditional Convergence Provides useful measures of capital account openness Arrow Debreu.

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Comments on Eswar Prasad IPF 15.07.08

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  1. Comments on Eswar PrasadIPF 15.07.08 Partha Sen Delhi School of Economics

  2. Prasad’s Paper • In addition to the usual arguments emphasizes institution building role of convertibility • Conditional Convergence • Provides useful measures of capital account openness • Arrow Debreu

  3. Trade vs Capital Flows • Open capital account →Asset prices determined by this →current account transactions • Indian experience– not quite “impossible trinity” but monetary policy hamstrung by flows • Different problems with inflows and outflows

  4. Outflows • Planned—insurance (diversification of risks) • Unplanned—capital account shock

  5. Sudden Outflows • Calvo:“Russia’s default in August 1998…(raised) interest rate spreads for LAC-7 (the big seven countries of Latin America) from 4.5 percent to 16 percent in September 1998... As a result, capital inflows to LAC-7 fell from 100 billion dollars (or 5.5 percent of GDP) in the year ending in II-1998, to 37 billion dollars (or 1.9 percent of GDP) one year later…By the year ending in IV-2002 capital flows to LAC-7 were less than 10 billion dollars, back to the very low levels of the late 1980s. The Russian virus affected every major country in Latin America, with the exception of Mexico...

  6. Outflows Calvo continued • Even Chile (with) a track record of sound macroeconomic management, a highly praised and sustained process of structural and institutional reforms that completely transformed and modernized Chile’s economy, and an average rate of growth of 7.4 percent per year between 1985 and 1997,…experienced a sudden and severe interruption in capital inflows (7.9 percent of GDP). That a partial debt default in Russia, a country that represented less than 1 percent of world GDP and had no meaningful financial or trading ties with Latin America, could precipitate a financial contagion shock wave of such proportions, posed a puzzle for the profession.”

  7. Growth Model • Inflows “absorbed” → current account deficits • Solow growth model • East Asia—openness and mercantilism • Both comparative and absolute advantages

  8. Rakesh Mohan • “(If)…exports comprise about 17 per cent of GDP by 2005-06,… it would become feasible for India to sustain a wider current account deficit which is required for the non-inflationary absorption of external capital inflows. It is suggested that a sustainable level of current account deficit would increase …(to) 3 per cent in 2005-06. It would then be possible for the net capital inflow to rise …to $30 billion by 2005-06.”

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