A Monetary Business Cycle Model for India

Abstract

A New Keynesian monetary business cycle model is constructed to study why monetary transmission in India is weak. Our models feature banking and financial sector frictions as well as an informal sector. The predominant channel of monetary transmission is a credit channel. Our main finding is that base money shocks have a larger and more persistent effect on output than an interest rate shock, as in the data. The presence of an informal sector hinders monetary transmission. Contrary to the consensus view, financial repression in the form of a statutory liquidity ratio and administered interest rates, does not weaken monetary transmission. .in 2. Both Mishra, Montiel, and Sengupta (2016) and Mohanty and Rishabh (2016) provide recent surveys of monetary transmission in India and emerging market and developing economies (EMDEs), respectively. See also Das (2015).

Fiscal austerity in emerging market economies

“…5 We show that the incidence of a contractionary …scal consolidation being expansionary now depends on the value of , the parameter denoting the relative superiority of government consumption vis-a-vis private consumption in utility. 6 When is low, a negative government spending shock increases private consumption and e¤ective consumption. The marginal utility from e¤ective consumption falls.…”

“…In the experiments we conduct later on, we arbitrarily set factor income taxes to be 10 times higher than the baseline case 6. Consistent with the empirical literature, we restrict 0 < < 1 ( seeAmbler and Paquet (1996), andBarro (1981)).…”

Transmission mechanism of monetary policy in India - An Expost Study

“…WALR -Fresh Rupee Loans was introduced during January 2015 to September 2016 with 5 basis points and continues in the FIT regimes. (13), 48-60, July-September, 2022 market and the corporate bond market with AAA-5-year, AAA-10-Year G-sec market are showing downturn from 3 rd October 2019 and wide variation in FIT (bps) is observed.…”

“…The challenges to effective transmission of monetary policy include policy induced abrasions like interest rate subventions, loan waivers, slow adjusting savings instruments and credit allocations (Lahiri and Patel, 2016). Similarly, Banerjee and others have observed that large dominance of informal credit sector is found to be the hindrance in the process (Banerjee et al, (2018). Shelja Bhatia (2019) in her work has observed that an expansionary monetary policy produces negative and significant impact on the Tier-I capital asset ratio of banks.…”

Evaluation of the Inflation Forecasting Process of the Reserve Bank of India: A Text Analysis Approach

“…With the change in its policy target to IT, now the question arises that, given India’s low-income level where households spend a substantial part of their income on food and fuel, can the RBI accurately forecast its inflation path so as to contain it within a predefined range. This is because food and fuel inflation are volatile, given the fact that India is heavily dependent on monsoon and crude import for its food and fuel needs, respectively (Banerjee et al, 2020; Bhattacharya & Sen Gupta, 2018; Pattanaik et al, 2020). Moreover, a large part of the Indian economy is in the informal sector that makes monetary transmission difficult (Anand et al, 2016; Benes et al, 2017; Kulshreshtha, 2011).…”