Macroeconometric evaluation of Indian trade policy: Structural sensitivity, stochastic dynamics and nonlinear optimal control

This dissertation investigates the effects of policy reform on the Indian trade sector over the period 1970 to 1985. The model used in this study is a multisectoral model that specifies the trade, monetary, and output sectors of the Indian economy. The model is estimated using limited and full information methods. Simulation and optimal control are used for policy analysis. India faced a severe economic crisis in 1990/91. Foreign exchange reserves were depleted. Fiscal deficit and federal debt levels were at record high. Most macroeconomic indicators pointed to an economy on the brink of collapse. The Government of India obtained several short and medium-term loans from the International Monetary Fund and the World Bank to alleviate the crisis. The Government also implemented a series of policy measures to stabilize and restructure the economy. These included reforms in the trade sector, efforts to contain the fiscal deficit, and tight credit policies to reduce inflation. There is considerable controversy among Indian economists regarding the impact of these policy changes on long term economic performance. This study examines the effects of policy reform on the Indian trade sector, its repercussions on the domestic economy, and the welfare costs associated with such policies in restoring stability and future economic growth. Simulation and control theory are now well established in the economics profession. Simulation is used to examine the effects of exchange rate, monetary, and fiscal policy changes on various sectors of the economy. Control techniques are used to obtain optimal policies given economic targets, quantify the tradeoffs between alternative policy choices, and evaluate the welfare costs associated with various policy regimes. The study concludes that trade policy reform has significant and enduring effects on the monetary and output sectors. It also establishes the use of control theory in providing guidelines for policy formulation using the concept of welfare maximization.