Asia Confronts the Impossible Trinity

NIPFP Working Paper 64
[PDF]

Ila Patnaik and Ajay Shah
January 2010

Abstract

In this paper, we examine capital account openness and exchange rate flexibility in 11 Asian countries. Asia has made slow progress on de jure capital account openness, but has made much more progress on de facto capital account openness. While there is a slow pace of increase in exchange rate flexibility, most Asian countries continue to have largely inflexible exchange rates. This combination - of moving forward with de facto capital account integration without bringing in exchange rate flexibility - has lead to procyclicality of monetary policy when capital flows are procyclical. The paper emphasizes the case for a consistent monetary policy framework.

Why India Choked When Lehman Broke

NIPFP Working Paper 63
[PDF]

Ila Patnaik and Ajay Shah
January 2010

Abstract

India has an elaborate system of capital controls which impede capital mobility and particularly short-term debt. Yet, when the global money market fell into turmoil after the bankruptcy of Lehman Brothers on 13/14 September 2008, the Indian money market immediately experienced considerable stress, and the operating procedures of monetary policy broke down. We suggest that Indian multinationals were using the global money market and were short of dollars on 15 September. They borrowed in India and took capital out of the country. We make three predictions that follow from this hypothesis, and find that the evidence matches these predictions. This suggests an important role for Indian multinationals in India's evolution towards de facto convertibility.