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Comments on: “What Explains India’s Real appreciation?”

Comments on: “What Explains India’s Real appreciation?”. Sisira Jayasuriya. Contributions. Application of the tradables/nontradables (Swan-Salter or “Australian”) model to analyse RER issues In India

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Comments on: “What Explains India’s Real appreciation?”

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  1. Comments on: “What Explains India’s Real appreciation?” Sisira Jayasuriya

  2. Contributions • Application of the tradables/nontradables (Swan-Salter or “Australian”) model to analyse RER issues In India • Construction of a T/NT relative price series based on ratio of exports in total output: widening inflation differentials observed • Estimation of average labour productivity growth differentials • Analysis of RER movements, using a model with productivity growth differentials (BS effects) plus demand side variables (per capita income growth, government consumption, import/export price changes) • Conclusions: BS effects, fiscal deficits and falling import prices main causes of RER appreciation • Policy implications: more flexible ER policy, reduce fiscal deficit, continue liberalisation

  3. Theory • Balssa-Samuelson link between RER and productivity: based on competitive internal factor/product markets and “Law of One Price” globally for tradables • Law of One Price widely violated • NT in domestically consumed foreign T (imports) • Trade srestrictions • Competitive domestic markets??? • Imperfect/weak transmission of international prices to domestic prices • NT does not use T-inputs • Recent theoretical models incorporate imperfectly competitive markets, imperfect substitution between home and foreign produced tradables, NT incorporating tradables, costly intersectoral capital mobility etc. • BS effects much modified, sometimes reversed

  4. Some measurement issues • T/NT disaggregation: • 5% export ratio • All agriculture excluded from T • Data problems related to productivity growth in NT: transportation and communication services treated as a single NT sector • Productivity measure: labour productivity, not TFP • “…this distinction is anything but inconsequential….. When TFP is used..the positive association between productivity and the RER disappears..” (Lee and Tang, 2007, Review of International Economics: study of 12 OECD countries)

  5. Results: How Robust? What Implications? • Government expenditure: consumption only or total (including investment)? • Role of capital inflows, oil price shock etc? • Import price falls an important cause of changes in domestic T/NT relative price: • fall in import prices to country or fall in internal import prices due to trade liberalisation? • Fiscal Policy, particularly in recent year: quite minor role • Policy implications?

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