Articles by M J Manohar Rao

The relationship between budget deficits, money creation and debt financing suggests that interest rate targeting and inflation control are both monetary and fiscal policy issues. The paper formalises these links within two analytical frameworks, static as well as dynamic, which by highlighting the concepts of the 'high interest trap' and the 'tight money paradox', respectively, suggests that, for any given deficit, there exists optimal levels of monetisation and market borrowings. The model is then applied to evaluate the implications of the union budget 2000-01 and the results indicate that unless government borrowings are reduced substantially, and about 40 per cent of the deficit is monetised, the inflation rate as well as the interest rate could be much higher than what they fundamentally ought to be.



This study presents for the first time in the Indian context a consistent set of annual macro-economic data from 1950-51 to 1997-98 by integrating the national accounts statistics of the CSO with the balance of payments and the monetary data of the RBI as well as with the fiscal data of the government of India. Despite certain minor problems of definitions and measurements left unresolved by this exercise, the resulting integration helped us to detect the structural changes that have occurred in the real and financial sectors of the Indian economy over the entire sample period, in general, and between the pre- and postliberalisation phases, in particular. In such a context, we have identified many important empirical patterns and regularities, notably the existence of business cycles, the counter-cyclical nature of inflation, the cyclical variations in income distribution, the twin deficits problem, the impact of absorption on reserves, the evolution of the debt-income ratio, the relationship between real interest rates and growth, the sustainability of the fiscal stance, amongst others, which could act as theoretical guideposts for the formulation of issues in the role and conduct of macro-economic stabilisation policy. In this first part, we use a consistency accounting matrix which specifies the linkages between sources and uses of funds as well as between institutional sector accounts. It is seen that the resulting framework ensures the numerical consistency of data drawn from different sources in such a way that both the sectoral budget constraints as well as the overall economywide budget constraints are simultaneously satisfied.

This paper examines the relationship between budget deficits, money creation and debt financing which suggests that interest rate targeting and inflation control are both monetary and fiscal policy issues. It then formalises these links within an analytical framework which, by highlighting the concept of the 'high-interest trap'. suggests that, for any given deficit, there exists optimal levels of monetisation and market borrowings. The model is then applied to evaluate the implications of the Union Budget 1998-99 and the results indicate that unless government borrowings are reduced substantially, the inflation rate would be much higher than what the fundamentals require it to be.

Macro-Economics of Capital Account Convertibility M J Manohar Rao Introduction THE authorities in many developing countries, including India, are currently implementing de jure liberalisation of the capital account of the balance of payments (BOP). At least two reasons can be identified for this interest in financial openness. First, there has been increasing de facto opening of the capital account: the effectiveness of capital controls has declined due to growing trade integration, financial innovations and financial opening elsewhere; and 15 years after the debt crisis, credit rationing by commercial banks is fading away while flight capital is being repatriated. Second, there is a proposal from the International Monetary Fund (IMF) to amend the articles of agreement to incorporate CAC as one of the obligations of Fund membership.