Dev Deep Kar

for guiding staff interns on data sources and collection. He would also like to thank Raymond Baker and other staff at GFI for helpful comments. Finally, thanks are due to the staff of the IMF’s Statistics Department, the Reserve Bank of India, and Mr. Swapan Pradhan of the Bank for International Settlements for their assistance with data. Any errors that remain are the author’s responsibility. The views

for guiding staff interns on data sources and collection. He would also like to thank Raymond Baker and other staff at GFI for helpful comments. Finally, thanks are due to the staff of the IMF’s Statistics Department, the Reserve Bank of India, and Mr. Swapan Pradhan of the Bank for International Settlements for their assistance with data. Any errors that remain are the author’s responsibility. The views

2012. This is the sixth in our annual series, and it reaffirms the $1 trillion estimate of unrecorded money shifting yearly out of emerging market and developing countries. Perhaps this is a good point to take stock of where we have come from and where we are going. When Global Financial Integrity (GFI) was formed in 2006, we decided to analyze unrecorded money disappearing out of developing countries in a way that did not repeat the same methodology I had employed in my book, Capitalism’s Achilles Heel. † I had conducted a series of surveys around the world to come up with an estimate of $500 billion annually moving out of developing countries. This was a very expensive process, involving a total of 885 interviews in some 25 countries, and was not something we could repeat with limited funds. Besides, we wanted a more sophisticated, robust economic analysis. After careful consideration, we chose to use the World Bank Residual Method and International Monetary Fund Direction of Trad...

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A re-examination of the Aghevli-Khan model developed at the International Monetary Fund (IMF) revealed that the specification of the money supply function provided an unconvincing test of the link between government deficits and monetary growth. Their specification of the money supply function was found to be, for all practical purposes, an identity thereby explaining little. Furthermore, they also assumed that the impact of changes in the fiscal deficit on the monetary base was independent of other variables in the money supply function which were therefore treated as exogenous by the model. We respecified the model casting the money supply equation as a function of the fiscal deficit only -- a formulation testing the hypothesis that deficits were largely financed through money creation. This confirmed the thesis that in a period characterized by financial repression, the government could not tap domestic savings adequately to be able to finance the deficits in a non-inflationary manner. Instead, the government had to rely almost exclusively on credits from the monetary authorities to finance its budget deficits. The reformulated dynamic simulation model confirmed that the inflation thus generated further widened the deficits due to the asymmetrical adjustment of government expenditures and revenues to inflation. This vindicated the IMF model but that vindication only held under the limiting condition of the pure money finance of government deficits. Non-inflationary financing of government deficits would break the vicious-cycle hypothesis not only for Brazil but for other countries as well.

The article argues that academia (e.g. Arvind Panagariya, Foreign Policy, January 2009) and recent media reports crediting the foresight and conservative policies of the Reserve Bank of India (RBI) in limiting the impact of global financial crisis on Indian banks, is largely misplaced. The reason why Indian banks escaped the crisis relatively unscathed has more to do with the historically inward-looking bank regulations that Governor Reddy inherited and the lack of independence of the RBI rather than any foresight into the nature, extent, and timing of the financial crisis. Indeed, insular banking policies have come at a steep cost.

LONG-TERM TRENDS IN OPENNESS OF NATIONAL ECONOMIES: COMMENT By DEV KUMAR KAR1 In a recent article, Grassman (1980) analyzes the long-term trends in the openness of national economies using simple trade and capital measures of openness. He finds ...