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A Monetary Business Cycle Model for India

Author

Listed:
  • Shesadri Banerjee

    () (Madras Institute of Development Studies)

  • Parantap Basu

    () (Durham University, Durham University Business School)

  • Chetan Ghate

    () (Indian Statistical Institute)

  • Pawan Gopalakrishnan

    () (Reserve Bank of India)

  • Sargam Gupta

    () (Indian Statistical Institute)

Abstract

We build and calibrate a New Keynesian monetary business cycle model to theIndian economy to understand why the aggregate demand channel of monetary transmission is weak. Our main Önding is that base money shocks have a larger and more persistent effect on output than an interest rate shock, as in the data. We show that Önancial repression, in the form of a statutory liquidity ratio and administered interest rates, does not weaken monetary transmission. This is contrary to the consensus view in policy discussions on Indian monetary policy. We show that the presence of an informal sector hinders monetary transmission.

Suggested Citation

  • Shesadri Banerjee & Parantap Basu & Chetan Ghate & Pawan Gopalakrishnan & Sargam Gupta, 2018. "A Monetary Business Cycle Model for India," CEGAP Working Papers 2018_01, Durham University Business School.
  • Handle: RePEc:dur:cegapw:2018_01
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    References listed on IDEAS

    as
    1. Madhusudan Mohanty & Kumar Rishabh, 2016. "Financial intermediation and monetary policy transmission in EMEs: What has changed post-2008 crisis?," BIS Working Papers 546, Bank for International Settlements.
    2. Chang, Su-Hsin & Contessi, Silvio & Francis, Johanna L., 2014. "Understanding the accumulation of bank and thrift reserves during the U.S. financial crisis," Journal of Economic Dynamics and Control, Elsevier, vol. 43(C), pages 78-106.
    3. Matteo Iacoviello, 2005. "House Prices, Borrowing Constraints, and Monetary Policy in the Business Cycle," American Economic Review, American Economic Association, vol. 95(3), pages 739-764, June.
    4. Marianne Baxter & Robert G. King, 1999. "Measuring Business Cycles: Approximate Band-Pass Filters For Economic Time Series," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 575-593, November.
    5. Pesaran, H. Hashem & Shin, Yongcheol, 1998. "Generalized impulse response analysis in linear multivariate models," Economics Letters, Elsevier, vol. 58(1), pages 17-29, January.
    6. Vasco J. Gabriel & Paul Levine & Joseph Pearlman & Bo Yang, 2010. "An Estimated DSGE Model of the Indian Economy," NIPE Working Papers 29/2010, NIPE - Universidade do Minho.
    7. Sonali Das, 2015. "Monetary Policy in India; Transmission to Bank Interest Rates," IMF Working Papers 15/129, International Monetary Fund.
    8. Andrea Gerali & Stefano Neri & Luca Sessa & Federico M. Signoretti, 2010. "Credit and Banking in a DSGE Model of the Euro Area," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(s1), pages 107-141, September.
    9. Prachi Mishra & Peter J Montiel & Rajeswari Sengupta, 2016. "Monetary Transmission in Developing Countries; Evidence from India," IMF Working Papers 16/167, International Monetary Fund.
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    Cited by:

    1. Dave, Chetan & Ghate, Chetan & Gopalakrishnan, Pawan & Tarafdar, Suchismita, 2018. "Fiscal Austerity in Emerging Market Economies," MPRA Paper 87086, University Library of Munich, Germany.

    More about this item

    Keywords

    Monetary Business Cycles; Monetary Transmission; Ináation Targeting.;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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