Examining the decoupling hypothesis for India Shruthi Jayaram Ila Patnaik Ajay Shah National Institute of Public Finance and Policy, New Delhi March 24, 2009 Shruthi Jayaram, Ila Patnaik, Ajay Shah National Institute of Public Finance and Policy, New Delhi () Examining the decoupling hypothesis for India March 24, 2009 1 / 30
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Examining the decoupling hypothesis for India
Shruthi Jayaram Ila Patnaik Ajay Shah
National Institute of Public Finance and Policy, New Delhi
March 24, 2009
Shruthi Jayaram, Ila Patnaik, Ajay Shah National Institute of Public Finance and Policy, New Delhi ()Examining the decoupling hypothesis for India March 24, 2009 1 / 30
Recent debate on decoupling has increased in the recent crisis:Greater trade and financial linkages suggest synchronisation.But developing countries like India and China did not slow downlike industrial countries.Theory does not give a clear guidance on whether there should be“coupling” or “decoupling”.
Shruthi Jayaram, Ila Patnaik, Ajay Shah National Institute of Public Finance and Policy, New Delhi ()Examining the decoupling hypothesis for India March 24, 2009 2 / 30
Emprical research in the field1 Studies changes in comovements over time.2 Measures spillover from industrial countries to developing
countries.3 Analyses determinants of business cycle comovement.
Shruthi Jayaram, Ila Patnaik, Ajay Shah National Institute of Public Finance and Policy, New Delhi ()Examining the decoupling hypothesis for India March 24, 2009 3 / 30
Shruthi Jayaram, Ila Patnaik, Ajay Shah National Institute of Public Finance and Policy, New Delhi ()Examining the decoupling hypothesis for India March 24, 2009 4 / 30
Shruthi Jayaram, Ila Patnaik, Ajay Shah National Institute of Public Finance and Policy, New Delhi ()Examining the decoupling hypothesis for India March 24, 2009 5 / 30
Shruthi Jayaram, Ila Patnaik, Ajay Shah National Institute of Public Finance and Policy, New Delhi ()Examining the decoupling hypothesis for India March 24, 2009 6 / 30
Shruthi Jayaram, Ila Patnaik, Ajay Shah National Institute of Public Finance and Policy, New Delhi ()Examining the decoupling hypothesis for India March 24, 2009 7 / 30
Table: Correlations of weekly returns on the CMIE Cospi stock market indexagainst global stock market indexes
UK FTSE-100 Japan Nikkei-225 US S&P 5001992-1997 -0.008 -0.038 -0.0231997-2003 0.184 0.168 0.1672003-2008 0.463 0.390 0.339Full period 0.192 0.149 0.150
Shruthi Jayaram, Ila Patnaik, Ajay Shah National Institute of Public Finance and Policy, New Delhi ()Examining the decoupling hypothesis for India March 24, 2009 8 / 30
Theory:Increased trade implies demand shocks in one country lead tooutput shocks in another.Shocks such as commodity/oil prices can affect all countries.Monetary policy shocks can get transmitted.Increased financial integration implies financial shocks in onecountry may lead to contagion.
ButImpact of specialisation/vertical production structures on shockscan result in decoupling.
Shruthi Jayaram, Ila Patnaik, Ajay Shah National Institute of Public Finance and Policy, New Delhi ()Examining the decoupling hypothesis for India March 24, 2009 9 / 30
Empirical studies:Evidence for synchronisation strong in developed countries(Frankel and Rose, 1998).No consensus for developing economies.Evidence of greater comovement with greater trade: (Calderon,Chong and Stein, 2003)Others seem to suggest decoupling of Indian and Chinesebusiness cycles from industrial countries. (Fidrmuc, Korhonen andBatorova, (2008), Kose, Otrok, Prasad (2008)).No study focusing only on India.
Shruthi Jayaram, Ila Patnaik, Ajay Shah National Institute of Public Finance and Policy, New Delhi ()Examining the decoupling hypothesis for India March 24, 2009 10 / 30
Shruthi Jayaram, Ila Patnaik, Ajay Shah National Institute of Public Finance and Policy, New Delhi ()Examining the decoupling hypothesis for India March 24, 2009 11 / 30
2000 2001 2002 2003 2004 2005Shruthi Jayaram, Ila Patnaik, Ajay Shah National Institute of Public Finance and Policy, New Delhi ()Examining the decoupling hypothesis for India March 24, 2009 12 / 30
2000 2001 2002 2003 2004 2005Shruthi Jayaram, Ila Patnaik, Ajay Shah National Institute of Public Finance and Policy, New Delhi ()Examining the decoupling hypothesis for India March 24, 2009 13 / 30
2000 2001 2002 2003 2004 2005Shruthi Jayaram, Ila Patnaik, Ajay Shah National Institute of Public Finance and Policy, New Delhi ()Examining the decoupling hypothesis for India March 24, 2009 14 / 30
2000 2001 2002 2003 2004 2005Shruthi Jayaram, Ila Patnaik, Ajay Shah National Institute of Public Finance and Policy, New Delhi ()Examining the decoupling hypothesis for India March 24, 2009 15 / 30
Shruthi Jayaram, Ila Patnaik, Ajay Shah National Institute of Public Finance and Policy, New Delhi ()Examining the decoupling hypothesis for India March 24, 2009 16 / 30
India: Index of Industrial Production (IIP).US: Conference Board coincident indicator.Industrial economies: IIP for all industrialised economies.Three sub-samples: 1992-1997, 1997-2003, 2003-2008.
Shruthi Jayaram, Ila Patnaik, Ajay Shah National Institute of Public Finance and Policy, New Delhi ()Examining the decoupling hypothesis for India March 24, 2009 17 / 30
Shruthi Jayaram, Ila Patnaik, Ajay Shah National Institute of Public Finance and Policy, New Delhi ()Examining the decoupling hypothesis for India March 24, 2009 18 / 30
Shruthi Jayaram, Ila Patnaik, Ajay Shah National Institute of Public Finance and Policy, New Delhi ()Examining the decoupling hypothesis for India March 24, 2009 19 / 30
Shruthi Jayaram, Ila Patnaik, Ajay Shah National Institute of Public Finance and Policy, New Delhi ()Examining the decoupling hypothesis for India March 24, 2009 20 / 30
Indian IIP during the US expansion and contraction
Time
YO
Y II
P
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
−0.
020.
010.
030.
050.
070.
090.
110.
130.
15
YOY IIPNBER dates
Shruthi Jayaram, Ila Patnaik, Ajay Shah National Institute of Public Finance and Policy, New Delhi ()Examining the decoupling hypothesis for India March 24, 2009 21 / 30
The above suggests business cycle synchronisation.
Questions for formal analysis:Are Indian business cycles synchronised with industrial countrybusiness cycles?How has synchronisation changed over time?How does comovement with industrial economies compare withthat with the US?
Shruthi Jayaram, Ila Patnaik, Ajay Shah National Institute of Public Finance and Policy, New Delhi ()Examining the decoupling hypothesis for India March 24, 2009 22 / 30
Shruthi Jayaram, Ila Patnaik, Ajay Shah National Institute of Public Finance and Policy, New Delhi ()Examining the decoupling hypothesis for India March 24, 2009 23 / 30
Studies the “state-series" of a variable: 0-1 binary variableIndex of concordance: Proportion of time that two variables are inthe same state [Harding and Pagan, 2006]Index = 0, countercyclical. Index = 1, procyclical. E[Index] = 0.5.
Shruthi Jayaram, Ila Patnaik, Ajay Shah National Institute of Public Finance and Policy, New Delhi ()Examining the decoupling hypothesis for India March 24, 2009 24 / 30
Shruthi Jayaram, Ila Patnaik, Ajay Shah National Institute of Public Finance and Policy, New Delhi ()Examining the decoupling hypothesis for India March 24, 2009 25 / 30
There is business cycle synchronisation over 1992-2008.This is increasing over time.
1992-1997: Weakly counter-cyclical to world cycle1997-2003: Weakly pro-cyclical2003-2008: Strongly procyclical and synchronised
Indian cycle seems more synchronised with industrial economiescycles than with US cycles
Shruthi Jayaram, Ila Patnaik, Ajay Shah National Institute of Public Finance and Policy, New Delhi ()Examining the decoupling hypothesis for India March 24, 2009 26 / 30
There is evidence of business cycle synchronisation.This synchronisation has increased over time.Indian business cycles are more synchronised with cycles in abroader group of industrial countries than with the US.
Shruthi Jayaram, Ila Patnaik, Ajay Shah National Institute of Public Finance and Policy, New Delhi ()Examining the decoupling hypothesis for India March 24, 2009 27 / 30
Alternative methodologies - cross-correlation and spectralanalysis.Change sample period:
This is not a definite “start-end" process. Rather, slowly evolvingphenomenon reflecting structural changes in the Indian economySo, change sample break dates to Feb-1998 and Jun-2004.
Detrend the data using the HP filterRedefine key variables: use US industrial production, World trade.
The key results hold.
Shruthi Jayaram, Ila Patnaik, Ajay Shah National Institute of Public Finance and Policy, New Delhi ()Examining the decoupling hypothesis for India March 24, 2009 28 / 30
To study the transmission mechanism of business cyclesynchronisation.Use other indicators to study comovements.
Shruthi Jayaram, Ila Patnaik, Ajay Shah National Institute of Public Finance and Policy, New Delhi ()Examining the decoupling hypothesis for India March 24, 2009 29 / 30
Shruthi Jayaram, Ila Patnaik, Ajay Shah National Institute of Public Finance and Policy, New Delhi ()Examining the decoupling hypothesis for India March 24, 2009 30 / 30