The Rise and Fall of India's Relative Investment Price: A Tale of Policy Error and Reform
American Economic Journal: Macroeconomics
vol. 14,
no. 1, January 2022
(pp. 146-78)
Abstract
India's relative price of investment rose 44 percent from 1981 to 1991 and fell 26 percent from 1991 to 2006. We build a simple DGE model, calibrated to Indian data, in order to explore the impact of capital import substitution policies and their reform post-1991 in accounting for this rise and fall. Our model delivers a 23 percent rise before reform and a 31 percent fall thereafter. GDP per effective labor was 3 percent lower in 1991 compared to 1981 due to import restrictions on capital goods. Their removal, and a 71 percentage point reduction in tariff rates, raised GDP per effective labor permanently by 20 percent.Citation
Johri, Alok, and Md Mahbubur Rahman. 2022. "The Rise and Fall of India's Relative Investment Price: A Tale of Policy Error and Reform." American Economic Journal: Macroeconomics, 14 (1): 146-78. DOI: 10.1257/mac.20180411Additional Materials
JEL Classification
- E22 Investment; Capital; Intangible Capital; Capacity
- E23 Macroeconomics: Production
- F13 Trade Policy; International Trade Organizations
- O11 Macroeconomic Analyses of Economic Development
- O16 Economic Development: Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
- O19 International Linkages to Development; Role of International Organizations
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