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A Monetary Business Cycle Model For India

Author

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  • Shesadri Banerjee
  • Parantap Basu
  • Chetan Ghate

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. (JEL E31, E32, E44, E52, E63)

Suggested Citation

  • Shesadri Banerjee & Parantap Basu & Chetan Ghate, 2020. "A Monetary Business Cycle Model For India," Economic Inquiry, Western Economic Association International, vol. 58(3), pages 1362-1386, July.
    • Handle: RePEc:bla:ecinqu:v:58:y:2020:i:3:p:1362-1386
    DOI: 10.1111/ecin.12855
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    Cited by:

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    4. Kshitiz Mishra & Partha Chatterjee, 2021. "Monetary Business Cycle Accounting Analysis of Indian Economy," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 19(3), pages 471-491, September.
    5. Kumar, Alok, 2023. "Financial market imperfections, informality and government spending multipliers," Journal of Development Economics, Elsevier, vol. 163(C).
    6. Chetan Ghate & Pawan Gopalakrishnan & Anuradha Saha, 2023. "The Great Indian Savings Puzzle," IEG Working Papers 459, Institute of Economic Growth.
    7. Shah, Sayar Ahmad & Garg, Bhavesh, 2023. "Testing policy effectiveness during COVID-19: An NK-DSGE analysis," Journal of Asian Economics, Elsevier, vol. 84(C).
    8. Ghosh, Saurabh & Gopalakrishnan, Pawan & Ranjan, Abhishek, 2022. "Technology shocks, banking sector policy, and the trade-off between firms and households," Economic Analysis and Policy, Elsevier, vol. 75(C), pages 664-688.
    9. Nandi, Aurodeep, 2019. "Fiscal deficit targeting alongside flexible inflation targeting: India’s fiscal policy transmission," Journal of Asian Economics, Elsevier, vol. 63(C), pages 1-18.
    10. Shesadri Banerjee & Harendra Behera, 2023. "Financial frictions, bank intermediation and monetary policy transmission in India," Economics of Transition and Institutional Change, John Wiley & Sons, vol. 31(3), pages 749-785, July.
    11. Amrendra Pandey & Jagadish Shettigar & Amarnath Bose, 2021. "Evaluation of the Inflation Forecasting Process of the Reserve Bank of India: A Text Analysis Approach," SAGE Open, , vol. 11(3), pages 21582440211, July.
    12. Ghosh, Saurabh & Gopalakrishnan, Pawan & Satija, Sakshi, 2019. "Recapitalization in an Economy with State-Owned Banks - A DSGE Framework," MPRA Paper 96981, University Library of Munich, Germany.
    13. Kumar, Anshul, 2023. "A basic two-sector new Keynesian DSGE model of the Indian economy," MPRA Paper 115863, University Library of Munich, Germany.
    14. Ahsan, Md Nazmul & Thakur, Sounak, 2024. "The great Indian demonetization and gender gap in health outcomes: Evidence from two Indian states," Economics & Human Biology, Elsevier, vol. 53(C).

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    More about this item

    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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