Financial sector reforms and stochastic policy simulations: A flow of funds model for India

Financial sector reforms and stochastic policy simulations: A flow of funds model for India

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Article ID: iaor20062732
Country: Netherlands
Volume: 28
Issue: 3
Start Page Number: 319
End Page Number: 333
Publication Date: Apr 2006
Journal: Journal of Policy Modeling
Authors: , ,
Keywords: developing countries
Abstract:

We apply stochastic simulation methods to a system-wide flow of funds model for India for 1951–1994. We address two issues; first, the impact of financial reforms on interest rates and loanable funds, and second, the robustness of policy where there is uncertainty about the true model. We find considerable variation in policy risk depending on the policy instrument and the policy regime. Interest rate risks are greater in the controlled regime; quantity risks are greater in the decontrolled regime. Outcomes also depend on controls on intermediaries: more heavily controlled banks respond differently from other less heavily controlled financial intermediaries.

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