The Role of Macroeconomic Factors in Growth

Group 10
Abhinay Puvvala (FP/12)
Aman Goel (403/15)
Ayush Garg (417/15)
Harshit Duggal (424/15)

Problem Statement

The purpose of this project is to find out the correlation between various economic factors and growth of a country. We would be looking at basic Macroeconomic factors like inflation, large budget deficits, and distorted foreign exchange markets and how these effect the growth of a small and a large country.

Dataset and our Approach

We will work on a comprehensive data set of 122 Countries and analyze them on the basis of 15 variables spread over 28 years. The data set contains the various macroeconomic variables like inflation, large budget deficits and foreign exchange for these countries. We will analyze the data with various statistical techniques such as regression, correlation and aim to find out causal relationship between macroeconomic factors and growth.

Benefits

This study will help economists in framing the economic policies. They can understand the effect of any decision taken on long term health of a country. They can see the cross affect of the economic factors and design policies for long term growth of the economy. The size of the country also plays an important role in analyzing these factors.

Expected Outcomes
Inflation: At least theoretically Higher Inflation rates have a negative correlation towards growth rate. The basic goals for including this Macroeconomic factor in our project for analyzing the growth rate are
Is there an empirical relationship between growth and inflation?
Is the relationship stable across countries and across time periods?
Is the relationship structural?
Does the empirical relationship show that there is an exploitable trade-off by monetary policymakers?
If there is an exploitable trade-off, what are the welfare implications of that trade-off and what is the optimal rate of inflation?

Budget Deficits: Conventional analyses of sustained budget deficits demonstrate the negative effects of deficits on long-term economic growth. Under the conventional view, ongoing budget deficits decrease national saving, which reduces domestic investment and increases borrowing from abroad. The reduction in domestic investment and the increase in the current account deficit both reduce future national income, with the loss in income steadily growing over time. Under the conventional view, the costs imposed by sustained deficits tend to build gradually over time. Substantial ongoing deficits can generate a self-reinforcing negative cycle among the underlying fiscal deficit, financial markets, and the real economy.

Foreign exchange market: We felt this as a very important factor because exchange rate of a currency generally reflects huge and diverse economic factors (Surplus/deficit budgets, Balance of trade, Inflation levels, Economic Health) apart from Political Conditions and Market Psychology. The above mentioned factors also directly or indirectly have a bearing on the growth of an economy. We would try to bring out how distorted foreign exchange markets can be detrimental for the growth of an economy.