Output Synchronization of the Indian Economy in the Post-reform Period
| Author | Raj Rajesh |
| Published date | 01 May 2017 |
| Date | 01 May 2017 |
| DOI | http://doi.org/10.1177/0015732516650824 |
| Subject Matter | Articles |
Output Synchronization
of the Indian Economy in
the Post-reform Period:
An Assessment
Raj Rajesh1
Abstract
This article examines whether cyclical fluctuation in India’s output was synchro-
nized with other major economies of the world in post-reform period. Using
panel GMM estimation, it is established that in the post-reform period cyclical
output of Indian economy shared a common trend with some of the advanced
economies and the emerging market economies. The sources of such business
cycle synchronization were found to be increased trade intensity, similarities in
productive structure, similar monetary policy stance and events of major eco-
nomic crises. This suggests that Indian economy cannot remain decoupled from
major economic crises in the global economy and, therefore, Indian policymakers
need to factor in global events in their policy response function.
JEL: F44, F14, E52
Keywords
Business cycle synchronization, trade intensity, monetary policy, crisis
Introduction
The world economy has become more integrated since the 1980s as the forces of
globalization have caused greater movement or transfer of people, knowledge or
technology, goods and services, and capital flows, amongst other things. In the
globalized economy, as the economies have become more open and integrated,
volatile capital flows, and shocks in the external economy affect an economy
notwithstanding its sound domestic fundamentals. Events of economic crises in
Foreign Trade Review
52(2) 63–89
©2017 Indian Institute of
Foreign Trade
SAGE Publications
sagepub.in/home.nav
DOI: 10.1177/0015732516650824
http://ftr.sagepub.com
Article
1 Internal Debt Management Department, Reserve Bank of India, Fort, Mumbai, India.
Corresponding author:
Raj Rajesh, Internal Debt Management Department, Reserve Bank of India, Fort, Mumbai 400001,
India.
E-mail: rajr.rbi@gmail.com
64 Foreign Trade Review 52(2)
one part of the globe (such as the recent great recession) have been found to have
become a widespread phenomenon affecting almost all the countries of the world.
This highlights the fact that business cycles of the economies have become more
synchronized.
Against this backdrop, in view of growing economic openness, it becomes
important for policy makers to take cognizance of the fact that a nation’s business
cycle may be correlated with some of its trading partners and other countries,
implying thereby that developments elsewhere may influence and impact a
nation’s economic activity. It is, therefore, very important from the policy makers’
perspective to understand the extent of business cycle synchronization of its
economy with other countries so as to assess whether there is a scope for macr-
oeconomic policy coordination. This would also enable them to design timely
and effective macroeconomic stabilization measures, especially in the events of
economic downturn. An assessment of the business cycle synchronization of an
economy is important for the monetary policy formulation in view of the very
rapid transmission of market impulses through highly volatile capital flows,
which calls for active monetary management policies. Domestic macroeconomic
policies, therefore, need to factor in the developments abroad while formulating
policies, in case a country’s business cycle is correlated with other countries.
Furthermore, policy makers also need to know the sources of output synchroni-
zation, whether trade linkages or financial linkages or policy similarities or
common external shocks or a mix of these factors cause output synchronization.
This helps them condition the ordering and pace of reforms.
Owing to its growing external linkages, India suffered the brunt of the recent
Great Recession, notwithstanding the fact that its domestic fundamentals
remained sound. This was owing to the fact that India’s business cycle remained
correlated with many of the advanced economies. Few studies for the Indian
economy have established the growing correlation of India’s business cycle with
other economies (Dua & Sharma, 2013; Male, 2010; Mall, 2001; Paul, 2008;
RBI, 2010). This study probes this issue of synchronization of India’s business
cycle with several advanced economies and the emerging market economies
(EMEs). In particular, the present study seeks to probe the following issues.
What are the determinants of India’s business cycle synchronization with other
economies? Does trade intensity contribute to correlated business cycles of the
Indian economy with other economies? Has there been any role of monetary
policy in bringing about synchronization of Indian economy with other econo-
mies? Do similarities in productive structure of economies contribute to synchro-
nization of business cycles? Do shocks such as the crisis episodes cause
correlation of business cycles?
Against this backdrop, the study is structured as follows. The next section dis-
cusses relevant literature on business cycle synchronization of Indian economy
with various other economies. The third section charts the co-movement of cycli-
cal component of output of the Indian economy with several advanced economies
as also the EMEs. The fourth section covers sources of data used in the analysis
as also the panel data estimation. Concluding observations are discussed in the
last section.
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