An Application of Quah and Vahey’s SVAR Methodology for Estimating Core Inflation in India: A Note

Inflation, calculated as year-on-year per cent change in general price level, represents a combined effect of several types of price changes. The monetary authorities primarily focus to track that part of inflation, which can be effectively monitored and controlled using various monetary instruments. This persistent component of inflation is termed as ‘Core Inflation’, which possesses long-run properties as well as predictive power to forecast inflation. This paper makes use of Quah and Vahey’s definition of core inflation as that component of headline inflation, which has no impact on output in medium to long run and estimates it by placing restrictions on vector auto regression system with inflation and output growth. The analysis is based on monthly data from April 1995 to January 2009. Empirical results showed that in India, during 2006 and 2007, the inflation process was stronger than what headline inflation figures actually depicted and in 2008 the inflationary process has tended to be somewhat weaker than what was observed in headline inflation.

     

The Regional Comprehensive Economic Partnership: new paradigm or old wine in a new bottle?

The Association of Southeast Asian Nations (ASEAN) is currently negotiating with its six trading partners to form a new trade agreement called the Regional Comprehensive Economic Partnership (RCEP). The RCEP intends to harmonise rules and regulations across multiple overlapping free trade agreements in the region, and thereby attract new members. However, it faces several challenges. The mention of a flexibility principle and the ‘ASEAN Way’ of decision‐making has led many to believe that the RCEP will be yet another low‐quality regional trade agreement. However, the RCEP presents all ASEAN members with the opportunity to take a role in setting the agenda for a region‐wide agreement. Hence, despite its challenges, ASEAN must make the effort to reach an attractive RCEP vis‐à‐vis other competing regional agreements. Accordingly, this paper describes what the RCEP is intended to be, how it emerged, and the issues that might affect the agreement's final quality, in order to evaluate if it will establish a new paradigm or a repackaged version of ASEAN's existing trade agreements.     

A panel data model for subjective information on household income growth

Subjective expectations about future income changes are analyzed, using household panel data. The models used are extensions of existing binary choice panel data models to the case of ordered response. We consider static models with random and fixed individual effects. We also look at a dynamic random effects model which includes a measure for permanent and transitory income. We find that income change expectations strongly depend on realized income changes in the past: those whose income fell, are more pessimistic than others, while those whose income rose are more optimistic. Expected income changes are also significantly affected by employment status, family composition, permanent income, and past expectations. Expectations are then compared to the head of household’s ex post perception of the realized income change for the same period. The main finding is that rational expectations are rejected, and that in particular, households whose income has decreased in the past underestimate their future income growth.     

Factors influencing the decision to hire contract labour by Indian manufacturing firms

ABSTRACT

Over a third of workers employed in the Indian formal manufacturing sector are ‘contract’ workers – hired through the services of labour contractors, facing lower wages and no job security in relation to regular workers. We investigate the role of a variety of factors that influence the decision of employers to hire in contract workers, using information from a specially commissioned survey of manufacturing firms. While there are immediate cost advantages that tilt firms towards hiring in contract labour, a counterforce has employers favouring regular workers in firms that have a large proportion of their workforce concentrating on production activity – probably instances where long-term human capital investment by regular workers is important for the firm.

Abbreviation: CLA: Contract Labour (Regulation and Abolition) Act, 1970 ASI: Annual Survey of Industries NIC: National Industrial Classification MSME: Micro, Small and Medium Enterprises SEZ: Special Economic Zone ICRIER: Indian Council for Research on International Economic Relations     

FINANCIAL GLOBALISATION: PAST AND PRESENT

This article compares and contrasts the two modern periods of financial globalisation, approximately a century apart. The focal point of the first period was around the turn of the twentieth century, while that of the second was around the turn of the twenty‐first century. Financial globalisation in the latter era was far deeper and there was a remarkable across‐the‐board transformation of the global financial system. An interesting twenty‐first‐century phenomenon is the recent change in direction of capital flows: that is, sizeable sums of capital flowing from non‐industrial countries to advanced industrial countries.     

Remittances and GDP in Jamaica: An ARDL Bounds Testing Approach to Cointegration

Similar to other developing nations, Jamaica’s remittances, specifically inflows, are an important source of income support and foreign exchange earnings. Anecdotally, much has been said about the relationship between remittances and GDP in this country. Yet, less has been established using rigorous statistical inference. We test for unit roots with structural breaks and use the autoregressive distributed lag (ARDL) approach to cointegration to help fill this lacuna in the literature on Jamaica. Using annual data for the 1976–2014 period, we examine the relationship between GDP and remittances, both measured in constant 2010 US dollar terms, as we control for the common determinants of economic growth. The main finding is that GDP and remittances are cointegrated relationship wherein they both reinforce each other positively. This finding is statistically robust as the ARDL models have well-behaved errors and parameters that are generally stable over the period. We discuss policy implications of this finding.     

Trade and Personal Distribution of Wealth and Income: Beyond the Stolper–Samuelson Theorem

The effect of international trade on personal distribution of wealth and income is examined via the Stolper–Samuelson Theorem. It is shown that free trade between North and South increases (decreases) wealth and income inequality in the North (South). A concept of three classes – lower, middle and upper – is developed. It is shown that North–South free trade in goods leads to a middle class squeeze in the North and a middle class expansion in the South.