Browsing by Author "Mehrotra, Aaron"

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  • Mehrotra, Aaron (2007)
    Bank of Finland Research Discussion Papers 2/2007
    We examine developments in national contributions to euro area M3 for a sample of nine euro area countries during 1999-2005.We investigate the co-movements of national contributions with euro area M3 and discuss possible reasons for divergencies in growth rates of national contributions.Finally, we evaluate the information content of national contributions to M3 using formal tests of causality between monetary aggregates, consumer prices and equity prices. Key words: national contribution, M3, euro area JEL classification numbers: E51, E31
  • Mehrotra, Aaron (2007)
    Bofit. Focus/Opinion. Asiantuntijan näkemys 2/2007
  • Mehrotra, Aaron; Sánchez-Fung, José R. (2009)
    BOFIT Discussion Papers 23/2009
    Published in Journal of International Financial Markets, Institutions & Money, Volume 21, Issue 2, April 2011, Pages 207–228
    The paper estimates McCallum and Taylor monetary policy reaction functions, and hybrids mixing instruments and targets from the two frameworks, for 20 emerging market economies. McCallum-Taylor specifications with an interest rate instrument and a nominal income gap target perform better than benchmark Taylor rules in describing monetary policy in inflation targeting economies. Estimating reaction functions for economies operating monetary and exchange rate targeting regimes produces mixed results, often revealing a lean with the wind behaviour. Instrument smoothing is a feature in the monetary base and in the interest rate reaction functions, but the exchange rate is not consistently significant. The results from the econometric analysis are robust to using alternative estimators. JEL classification: E52, E58, F41 Keywords: McCallum and Taylor rules, nominal feedback rule, monetary policy, inflation targeting, emerging markets
  • Kaaresvirta, Juuso; Mehrotra, Aaron (2008)
    BOFIT Discussion Papers 22/2008
    Published in Economic change and restructuring, vol. 42, no. 4 (2009), pp. 263-271
    We use business survey data collected by the People's Bank of China for inflation forecast-ing. Some survey indicators lead to enhanced forecasting performance relative to the uni-variate benchmark model, especially for a period of moderate inflation. However, the esti-mated models do not do a good job of tracking the recent pickup in Chinese inflation, due to increases in food prices. Keywords: inflation forecasting; business surveys; China. JEL classification: C53; E31.
  • Mehrotra, Aaron; Nuutilainen, Riikka; Pääkkönen, Jenni (2011)
    BOFIT Discussion Papers 5/2011
    Published in Pacific Economic Review, Volume 18, Issue 1, February 2013, pp. 92-107
    We construct a small-scale dynamic stochastic general equilibrium (DSGE) model that features price rigidities, habit formation in consumption and costs in capital adjustment, and calibrate the model with data for the Chinese economy. Our interest centers on the impact of technology and monetary policy shocks for different structures of the Chinese economy. In particular, we evaluate how a rebalancing of the economy from investment-led to consumption-led growth would affect the economic dynamics after a shock occurs. Our findings suggest that a rebalancing would reduce the volatility of the real economy in the event of a technology shock, which provides support for policies aiming to increase the consumption share in China. Keywords: DSGE, rebalancing, monetary policy shocks, technology shocks, China. JEL Classification: E52, E60.
  • Kaaresvirta, Juuso; Koivu, Tuuli; Mehrotra, Aaron (2008)
    Bofit. Focus/Opinion. Expert view 3/2008
  • Mehrotra, Aaron; Sánchez-Fung, José R. (2010)
    BOFIT Discussion Papers 10/2010
    Published in Comparative Economic Studies, 52(4), 2010: 497-514
    The paper models monetary policy in China using a hybrid McCallum-Taylor empirical reaction function. The feedback rule allows for reactions to inflation and output gaps, and to developments in a trade-weighted exchange rate gap measure. The investigation finds that monetary policy in China has, on average, accommodated inflationary developments. But exchange rate shocks do not significantly affect monetary policy behavior, and there is no evidence of a structural break in the estimated reaction function at the end of the strict dollar peg in July 2005. The paper also runs an exercise incorporating survey-based inflation expectations into the policy reaction function and meets with some success.
  • Mehrotra, Aaron; Pääkkönen, Jenni (2011)
    BOFIT Discussion Papers 1/2011
    Published in Journal of Comparative Economics, Vol. 39, Iss. 3, Sept. 2011, pp. 406-411
    We use factor analysis to summarize information from various macroeconomic indicators, effectively producing coincident indicators for the Chinese economy. We compare the dynamics of the estimated factors with GDP, and compare our factors with other published indicators for the Chinese economy. The indicator data match the GDP dynamics well and discrepancies are very short. The periods of discrepancies seem to correspond to shocks affecting the growth process as neither autoregressive models for GDP itself nor various coincident indicators are able to forecast them satisfactorily. Avainsanat: factor models, principal component, GDP, China, C38, O4, P2, Aaron Mehrotra, Jenni Pääkkönen
  • Banerjee, Ryan; Hofmann, Boris; Mehrotra, Aaron (2020)
    BOFIT Discussion Papers 6/2020
    Using firm-level data for 18 major global economies, we find that the exchange rate affects corporate investment through a financial channel: exchange rate depreciation dampens corporate investment through firm leverage and FX debt. These findings are consistent with the predictions of a stylised model of credit risk in which exchange rates can affect investment through FX debt or borrowing in local currency from foreign lenders. Empirically, the channel is more pronounced in emerging market economies (EMEs), reflecting their greater dependence on foreign funding and their less developed financial systems. Moreover, we find that exchange rate depreciation induces highly leveraged firms to increase their cash holdings, supporting from a different angle the notion of a financial channel of the exchange rate. Overall, these findings suggest that the large depreciation of EME currencies since 2011 was probably a significant amplifying factor in the recent investment slowdown in these economies.
  • Mehrotra, Aaron (2006)
    BOFIT Discussion Papers 10/2006
    Published in International Advances in Economic Research, vol. 14(1), 2008, pages 36-47
    We examine money demand in the Chinese economy during a period characterized by significant disinflation and outright deflation, coupled with strong output growth.Our study establishes a stable money demand system for broad money M2.Inflation affects the adjustment of the system towards equilibrium, and shocks to broad money are found to lead to higher inflation in the context of an impulse response analysis.The results provide support for the PBoC's policy of specifying intermediate targets for money growth. Importantly, our results suggest that movements in the nominal effective exchange rate should be taken into account in a successful implementation of such a policy. Keywords: Money demand; Deflation; China JEL Classification: E31, E41
  • Mehrotra, Aaron; Rautava, Jouko (2007)
    BOFIT Discussion Papers 11/2007
    Published in Journal of Chinese Economic and Business Studies, Vol. 6, No. 3, 2008, pp. 225-239
    This paper evaluates the usefulness of business sentiment indicators for forecasting developments in the Chinese real economy.We use data on diffusion indices collected by the People's Bank of China for forecasting industrial production, retail sales and exports.Our bivariate vector autoregressive models, each composed of one diffusion index and one real sector variable, generally outperform univariate AR models in forecasting one to four quarters ahead.Similarly, principal components analysis, combining information from various diffusion indices, leads to enhanced forecasting performance.Our results indicate that Chinese business sentiment indicators convey useful information about current and future developments in the real economy.They also suggest that the official data provide a fairly accurate picture of the Chinese economy. Keywords: forecasting, diffusion index, VAR, China. JEL: E32, E37, P27
  • Kim, Soyoung; Mehrotra, Aaron (2017)
    BOFIT Discussion Papers 4/2017
    We examine the effects of monetary and macroprudential policies in the Asia-Pacific region, where many inflation targeting economies have adopted macroprudential policies in order to safeguard financial stability. Using structural panel vector autoregressions that identify both monetary and macro-prudential policy actions, we show that tighter macroprudential policies used to contain credit growth have also had a significant negative impact on macroeconomic aggregates such as real GDP and the price level. The similar effects of monetary and macroprudential policies may suggest a complementary use of the two policies at normal times. However, they could also create challenges for policy-makers, especially during times when low inflation coincides with buoyant credit growth.
  • Mehrotra, Aaron (Edita Prima, 2006)
    Suomen Pankki. E 34
    This thesis consists of four essays in empirical macroeconomics. The first three essays examine the conduct of monetary policy during a disinflationary and deflationary era, with the policy interest rates close to or at the zero bound.The questions of interest include the potency of the interest rate channel, the stability of broad money demand, and the possibility to use the exchange rate channel in order to affect economic activity and the price level.We use time series econometrics techniques, mainly vector autoregressions, focusing on Japan.While we find that basic relationships between the variables appear unaltered by deflation, a further stimulative impact is difficult to implement once the zero bound is hit.This can be due to political reasons, as in the case of introducing a tax on currency in order to bring about negative interest rates, or because the needed stimulus is very big, as in the case of yen depreciation to increase the price level.The last essay focuses on the fiscal policy aspects of the European Union's most recent enlargement.We examine whether the fiscal austerity required by the Maastricht criteria and the Stability and Growth Pact would be harmful for the socio-economic development of the new Member States.Introducing an indicator for socio-economic development and utilizing instrumental variables regressions, we find that fiscal retrenchment, including a lower level of public debt, would be advantageous for development.A policy implication is to maintain the Stability and Growth Pact or an equivalent intergovernmental fiscal rule to curb public spending and debt. Keywords: deflation, disinflation, zero lower bound, broadly defined liquidity, socio-economic development, Stability and Growth Pact, EU enlargement
  • Mehrotra, Aaron; Slacik, Tomás (2009)
    BOFIT Discussion Papers 18/2009
    We evaluate the monetary determinants of inflation in the Czech Republic, Hungary, Poland and Slovakia by using the McCallum rule for money supply. The deviation of actual money growth from the rule is included in the estimation of Phillips curves for the four economies by Bayesian model averaging. We find that money provides information about price developments over a horizon of ten quarters ahead, albeit the estimates are in most cases rather imprecise. Moreover, the effect of excessive monetary growth on inflation is mixed: It is positive for Poland and Slovakia, but negative for the Czech Republic and Hungary. Nevertheless, these results suggest that money does provide information about future inflation and that a McCallum rule could potentially be used in the future as an additional indicator of the monetary policy stance once the precision of the estimation improves with more data available.
  • Mehrotra, Aaron (2005)
    BOFIT Discussion Papers 17/2005
    Published in Journal of Comparative Economics, March 2007, Vol. 35, No 1, pp. 188-210
    We examine the role of the exchange and interest rate channels during recent deflation episodes in Japan, Hong Kong and China.We estimate open-economy structural vector autoregressive (SVAR) models for the three economies with different monetary regimes and varying degrees of openness.In both Japan and Hong Kong, shocks to the nominal effective exchange rate have a statistically significant impact on prices, with a notably stronger effect in Hong Kong.Our results provide evidence about the role of external influences in the deflation episodes of these economies, and could also be seen to weakly support suggestions to depreciate the currency in order to escape from a liquidity trap.The importance of the interest rate channel is also found to be high in Japan and Hong Kong.In China, where interest rates have not been an important monetary policy tool, neither exchange nor interest rate shocks significantly influence price developments. Keywords: Deflation, Zero lower bound, SVAR JEL Classification: E31, F41
  • Goel, Rajeev K.; Mehrotra, Aaron (2011)
    BOFIT Discussion Papers 4/2011
    Published in Applied Financial Economics Volume 22, Issue 11, 2012 as "Financial Payment Instruments and Corruption"
    Using recent pooled data from several developed nations, the paper uniquely examines whether the composition of payment instruments has a bearing on the prevalence of corruption in a country. Our results suggest that the choice of instruments matters. Paper credit transfer transactions are consis-tently associated with corrupt activities, while credit card transactions tend to reduce them. Cheques generally increase corruption, the results with respect to nonpaper credit transfers are mixed, while direct debits fail to show significant effects on corruption. These findings hold for alternative corruption measures and when allowance is made for endogeneity of payment instruments. Keywords: Corruption; Cheques; Credit card; Cash; Direct debit; Payment instruments JEL classification codes: K4; G3; H3; F3
  • Mehrotra, Aaron (2007)
    Bofit. Focus/Opinion. Expert view 2/2007
  • Mehrotra, Aaron; Sánchez-Fung, José R. (2008)
    BOFIT Discussion Papers 2/2008
    Published in China Economic Journal, Vol. 1, No. 3, 2008, 317-322
    This paper forecasts inflation in China over a 12-month horizon. The analysis runs 15 alternative models and finds that only those considering many predictors via a principal component display a better relative forecasting performance than the univariate benchmark.
  • Mehrotra, Aaron (2010)
    Bofit. Focus/Opinion. Expert view 2/2010
  • Mehrotra, Aaron (2006)
    BOFIT Online 2006/3
    We provide a brief overview of recent developments in the Indian macroeconomy, including aspects of the real economy, price developments, and monetary and fiscal policies.The picture that emerges is one of a rapidly growing economy, supported by strong domestic demand and credit flows.The economic boom has dragged the current account into deficit, while output growth has broadened to encompass the industrial sector.Fiscal deficit ratios have recently declined due to a rapid increase in the level of GDP, but public sector imbalances remain high, constraining necessary investments in health, education, physical infrastructure and overall poverty reduction. Keywords: India, economic growth, monetary policy, fiscal policy