Sunanda Sen

  • Working Paper No. 918 | December 2018
    Divergent trends, as observed, between growth in the financial and real sectors of the global economy entail the need for further research, especially on the motivations behind investment decisions. Investments in market economies are generally guided by call-put option pricing models—which rely on an ergodic notion of probability that conforms to a normal distribution function. This paper considers critiques of the above models, which include Keynes’s Treatise on Probability (1921) and the General Theory (1936), as well as follow-ups in the post-Keynesian approaches and others dealing with “fundamental uncertainty.” The methodological issues, as can be pointed out, are relevant in the context of policy issues and social institutions, including those subscribed to by the ruling state. As it has been held in variants of institutional economics subscribed to by John Commons, Thorstein Veblen, Geoffrey Hodgeson, and John Kenneth Galbraith, social institutions remain important in their capacity as agencies that influence individual behavior with their “informational-cognitive” functions in society. By shaping business concerns and strategies, social institutions have a major impact on investment decisions in a capitalist system. The role of such institutions in investment decisions via policy making is generally neglected in strategies based on mainstream economics, which continue to rely on optimization of stock market returns based on imprecise estimations of probability.

  • Policy Note 2015/5 | August 2015
    An Assessment in the Context of the IMF Rulings for Greece

    Developing countries, led by China and other BRICS members (Brazil, Russia, India, and South Africa), have been successfully organizing alternative sources of credit flows, aiming for financial stability, growth, and development. With their goals of avoiding International Monetary Fund loan conditionality and the dominance of the US dollar in global finance, these new BRICS-led institutions represent a much-needed renovation of the global financial architecture. The nascent institutions will provide an alternative to the prevailing Bretton Woods institutions, loans from which are usually laden with prescriptions for austerity—with often disastrous consequences for output and employment. We refer here to the most recent example in Europe, with Greece currently facing the diktat of the troika to accept austerity as a precondition for further financial assistance.

    It is rather disappointing that Western financial institutions and the EU are in no mood to provide Greece with any options short of complying with these disciplinary measures. Limitations, such as the above, in the prevailing global financial architecture bring to the fore the need for new institutions as alternative sources of funds. The launch of financial institutions by the BRICS—when combined with the BRICS clearing arrangement in local currencies proposed in this policy note—may chart a course for achieving an improved global financial order. Avoiding the use of the dollar as a currency to settle payments would help mitigate the impact of exchange rate fluctuations on transactions within the BRICS. Moreover, using the proposed clearing account arrangement to settle trade imbalances would help in generating additional demand within the BRICS, which would have an overall expansionary impact on the world economy as a whole.

  • Working Paper No. 828 | January 2015
    The Indian Case

    Financialization creates space for the financial sector in economies, and in doing so helps to raise the share of financial assets in the portfolios held by market participants. Largely driven by deregulation, the process works to make financial assets relatively attractive as compared to other assets, by offering both better returns and potential capital gains. Both the trend toward a more financialized economy and the expected returns on financial investments have provided incentives to corporate managers to invest larger sums in financial assets, resulting in growth of the share of financial assets relative to other assets held in portfolios. Assets held in the financial sector, however, failed to generate asset growth for the corporates. The need to obtain resources by borrowing in order to meet current liabilities reflects a pattern of Ponzi finance on their part. This paper traces the above pattern in corporate holdings of assets and its implications, with emphasis on the Indian economy.

  • Working Paper No. 813 | August 2014
    For Economic Stimulus, or for Austerity and Volatility?

    The implementation of economic reforms under new economic policies in India was associated with a paradigmatic shift in monetary and fiscal policy. While monetary policies were solely aimed at “price stability” in the neoliberal regime, fiscal policies were characterized by the objective of maintaining “sound finance” and “austerity.” Such monetarist principles and measures have also loomed over the global recession. This paper highlights the theoretical fallacies of monetarism and analyzes the consequences of such policy measures in India, particularly during the period of the global recession. Not only did such policies pose constraints on the recovery of output and employment, with adverse impacts on income distribution; but they also failed to achieve their stated goal in terms of price stability. By citing examples from southern Europe and India, this paper concludes that such monetarist policy measures have been responsible for stagnation, with a rise in price volatility and macroeconomic instability in the midst of the global recession.

  • Working Paper No. 761 | March 2013
    The Case of China

    The recent declines in China’s financial account balance ended the “twin surplus” era and led to a modest decline in the stock of official reserves, which reflects a reversal in expectations for the Chinese currency. Negative balances, which have been visible in China’s financial balances since the last quarter of 2011, have heightened fears/anxiety in markets. These deficits stand in sharp contrast to the typical financial account surplus that existed until 2010. The announcement in September 2011 by Chinese monetary authorities of a “two-way floating” RMB in the foreign exchange market has unsettled market expectations and has led to a sharp fall in the financial balance. The latter brought a change in the expectations regarding the RMB-USD exchange rate. This change was reflected in the drop in foreign exchange assets, which was caused by a jump in short-term trade credits to prepay (for imports) in dollars, a rise in dollar advances from banks, and a withdrawal of dollar deposits. These changes have, of late, been a cause of concern relating to the future of China’s economic relations vis-à-vis trading and financial partners, which include the United States.

    The experience of China, in a changing world beset with deregulation and with speculation affecting her external balance in recent years, provides further confirmation of John Maynard Keynes’s observation, in 1937, regarding uncertainty in markets: “About these matters there is no scientific basis on which to form any calculable probability whatever. We simply do not know.”

  • Working Paper No. 714 | April 2012
    China and India

    The narrative as well as the analysis of global imbalances in the existing literature are incomplete without the part of the story that relates to the surge in capital flows experienced by the emerging economies. Such analysis disregards the implications of capital flows on their domestic economies, especially in terms of the “impossibility” of following a monetary policy that benefits domestic growth. It also fails to recognize the significance of uncertainty and changes in expectation as factors in the (precautionary) buildup of large official reserves. The consequences are many, and affect the fabric of growth and distribution in these economies. The recent experiences of China and India, with their deregulated financial sectors, bear this out.

    Financial integration and free capital mobility, which are supposed to generate growth with stability (according to the “efficient markets” hypothesis), have not only failed to achieve their promises (especially in the advanced economies) but also forced the high-growth developing economies like India and China into a state of compliance, where domestic goals of stability and development are sacrificed in order to attain the globally sanctioned norm of free capital flows.

    With the global financial crisis and the specter of recession haunting most advanced economies, the high-growth economies in Asia have drawn much less attention than they deserve. This oversight leaves the analysis incomplete, not only by missing an important link in the prevailing network of global trade and finance, but also by ignoring the structural changes in these developing economies—many of which are related to the pattern of financialization and turbulence in the advanced economies.

  • Working Paper No. 677 | July 2011
    A Nonmainstream Perspective

    The global financial crisis has now spread across multiple countries and sectors, affecting both financial and real spheres in the advanced as well as the developing economies. This has been caused by policies based on “rational expectation” models that advocate deregulated finance, with facilities for easy credit and derivatives, along with globalized exposures for financial institutions. The financial crisis has combined with long-term structural changes in the real economy that trend toward underconsumption, generating contractionary effects therein and contributing to further instabilities in the financial sector. The responses so far from US monetary authorities have not been effective, especially in dealing with issues of unemployment and low real growth in the United States, or in other countries. Nor have these been of much use in the context of the lost monetary and fiscal autonomy in both developing countries and the eurozone, especially with the debt-related distress in the latter. Solutions to the current maladies in the global economy include strict control of financial speculation and the institution of an “employer of last resort” policy, both at the initiative of the state.

  • Working Paper No. 642 | December 2010

    China occupies a unique position among developing countries. Its success in achieving relative stability in the financial sector since the institution of reforms in 1979 has given way to relative instability since the beginning of the current global financial crisis. Over the last few years, China has been on a path of capital account opening that has drawn larger inflows of capital from abroad, both foreign-direct and portfolio investment. Of late, a surge in these inflows has introduced problems for the monetary authorities in continuing with an autonomous monetary policy in China, especially with large additions to official reserves, the latter in a bid to avoid further appreciation of the country’s domestic currency. Like other developing countries, China today faces the “impossible trilemma” of managing the exchange rate with near-complete capital mobility and an autonomous monetary policy. Facing problems in devising and sustaining this policy, China has been using expansionary fiscal policy to tackle the impact of shrinking export demand. The recent drive on the part of Chinese authorities to boost real demand in the countryside and to revamp the domestic market shows a promise far different from that of the financial rescue packages in many advanced nations.

    The close integration of China with the world economy over the last two decades has raised concerns from different quarters that relate both to (1) the possible effects of the recent global downturn on China and (2) the second-round effects of a downturn in China for the rest of world.


  • Working Paper No. 635 | November 2010
    A Review of the Literature

    This paper provides a survey of the literature on trade theory, from the classical example of comparative advantage to the New Trade theories currently used by many advanced countries to direct industrial policy and trade. An account is provided of the neo-classical brand of reciprocal demand and resource endowment theories, along with their usual empirical verifications and logical critiques. A useful supplement is provided in terms of Staffan Linder’s theory of “overlapping demand,” which provides an explanation of trade structure in terms of aggregate demand. Attention is drawn to new developments in trade theory, with strategic trade providing inputs to industrial policy. Issues relating to trade, growth, and development are dealt with separately, supplemented by an account of the neo-Marxist versions of trade and underdevelopment.

  • Working Paper No. 630 | October 2010
    The Case of India

    India has been experiencing rising inflows of overseas capital since the deregulation of its financial sector. Often looked upon as a success story among other emerging economies, the country has been subject to pitfalls and trilemmas that deserve attention. It has been officially recognized by the Governors of RBI that the financial crisis in India reflects the “dirty face” of what is described in the literature as the impossible trinity, along with the volatility in the markets that was caused by speculative capital in search of profits. However, Joseph Stiglitz observed that India’s policymakers, “particularly the Reserve Bank of India, are already doing a great job. I wish the US Federal Reserve displayed the same understanding of the role of regulation that the RBI has done, at least so far.” Recently, the United States made a path-breaking move with the launching of the recent bill on the regulation of Wall Street, which was passed by a majority of the Senate on May 20, 2010. We urge the implementation of similar laws in India and other emerging economies, especially in view of the fact that the recent moves for financial deregulation in these countries have, rather, been in the opposite direction.

  • Working Paper No. 623 | September 2010
    A Keynes-Minsky Episode?

    The enormity and pervasiveness of the global economic crisis that began in 2008 makes it relevant to analyze the circumstances that can explain this catastrophe. This will also provide clues to the appropriate remedial measures needed to prevent future occurrences of similar developments.

    The paper begins with some theoretical concerns relating to factors that could trigger a similar crisis. The first of these concerns relates to the deregulated financial institutions and the growing uncertainty that can be witnessed in these liberalized financial markets. The secondrelates to financial engineering with innovations in these markets, simultaneously providing cushions against risks while generating flows of liquidity that remain beyond the conventional sources of bank credit.

    Interpreting the role of uncertainty, one can observe the connections between investment and finance, both of which are subject to changes in the state of expectations. The initial formulation can be traced back to John Maynard Keynes’s General Theory (1936), where liquidity preference is linked to asset prices and new investments. The Keynesian analysis of the impact of uncertainty related expectations was reformulated in 1986 by Hyman P. Minsky, who introduced the possibility of sourcing external finance through debt, which further adds to the impact of uncertainty. Minsky’s characterization of deregulated financial markets considers the newfangled sources of nonbank credit, especially with the involvement of banks in the securities market under the universal banking model.

    As for the institutional arrangements that provide for profits on transactions, financial assets bought and sold in the primary market as initial public offerings of stocks are usually transacted later, in the secondary market, where these are no longer backed by physical assets.In the upswing, finance creates a myriad of financial claims and liabilities, and thus becomes increasingly remote from the real economy, while innovations to hedge and insulate assets continue to proliferate in the financial market, especially in the presence of uncertainty.

    The paper dwells on an account of the pattern of the financial crisis and its spread in the United States. This is appended by a stylized account of the turn of events in terms of a theoretical model that highlights the role of uncertainty in the process.

  • Working Paper No. 621 | September 2010

    We need to go beyond the accepted notions relating to the role of women in the economy and society, especially in terms of what is recognized in mainstream theory and policy as “work” done by women. Thus, the traditional gender roles, with the man as the breadwinner and the woman in the role of housekeeper, do not explain the contribution of women in general. We also need to go beyond standard models to interpret the intrahousehold gender inequities. We do not gain much insight from dwelling on the cooperative-conflict type of bargaining concepts either, which are offered in the literature to unfold the process of women’s subordination within households. The issues relate to the intrahousehold power structure, which has an inbuilt bias against female members under patriarchy.

    In terms of a policy agenda, especially in the context of social and economic disparities that affect women in particular, we need to recognize not only the collective social norms but also the unequal power relations that influence the sexual division of labor, both within the family and in the workplace. A notion of “gendered moral rationality,” complemented by the Rawlsian concept of “justice as fairness” (implying compensation for the underprivileged), can be used to devise policy that addresses the status of women both in the workplace and at home. We need a concerted move toward sensitization of gender issues and scrutiny entailing a gender audit at every level of activity. This may work at least partially until society is ready to remodel itself by treating men and women equally.

Publication Highlight

Public Policy Brief No. 157
Is It Time for Rate Hikes?
The Fed Cannot Engineer a Soft Landing but Risks Stagflation by Trying
Author(s): Yeva Nersisyan, L. Randall Wray
April 2022

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