Foreign Capital, Inflation, Sterilization, Crowding-Out and Growth: Some Illustrative Models
UC Santa Cruz International Economics Working Paper No. 04-09
41 Pages Posted: 1 Aug 2004
Date Written: May 2004
This paper discusses some puzzles in the contemporary macroeconomic scene in India, from the perspective of public finance and economic development. These include a fiscal deficit higher than it was during the 1991 crisis, but without a large current account deficit or rise in inflation or interest rates, a rising inflow of external capital, accompanied by the RBI's sterilizing these inflows and accumulating large reserves, even in the face of low inflation. We offer a critique of some previous analyses, and some models that are suggestive of how real and monetary factors might be integrated in providing a firmer grounding for the policy debates current in India.
Keywords: Foreign capital, sterilization, absorption, crowding out, inflation, growth
JEL Classification: F30, F41, F43, H62, O4
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