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Terms of Trade Shocks and Monetary Policy in India

Author

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  • Chetan Ghate

    (Indian Statistical Institute, Delhi)

  • Sargam Gupta

    (Indian Statistical Institute, Delhi)

  • Debdulal Mallick

    (Deakin University)

Abstract

Central banks in emerging market economies often grapple with understanding the monetary policy response to an inter-sectoral terms of trade shock. To address this, we develop a three sector closed economy NK-DSGE model calibrated to India. Our framework can be generalized to other emerging markets and developing economies. The model is characterized by a manufacturing sector and an agricultural sector. The agricultural sector is disaggregated into a grain and vegetable sector. The government procures grain from the grain market and stores it. We show that the procurement of grain leads to higher inflation, a change in the sectoral terms of trade, and a positive output gap because of a change in the sectoral allocation of labor. We compare the transmission of a single period positive procurement shock with a single period negative productivity shock and discuss the implications of such shocks for monetary policy setting. Our paper contributes to a growing literature on monetary policy in India and other emerging market economies.

Suggested Citation

  • Chetan Ghate & Sargam Gupta & Debdulal Mallick, 2018. "Terms of Trade Shocks and Monetary Policy in India," Computational Economics, Springer;Society for Computational Economics, vol. 51(1), pages 75-121, January.
    • Handle: RePEc:kap:compec:v:51:y:2018:i:1:d:10.1007_s10614-016-9630-z
    DOI: 10.1007/s10614-016-9630-z
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    Cited by:

    1. Kumar, Abhishek & Mallick, Sushanta & Sinha, Apra, 2021. "Policy errors and business cycle fluctuations: Evidence from an emerging economy," Journal of Economic Behavior & Organization, Elsevier, vol. 192(C), pages 176-198.
    2. Gupta, Sargam, 2024. "Inefficient shocks and optimal monetary policy," Economic Modelling, Elsevier, vol. 135(C).
    3. Bahl, Ojasvita & Ghate, Chetan & Mallick, Debdulal, 2020. "Redistributive Policy Shocks and Monetary Policy with Heterogeneous Agents," MPRA Paper 101651, University Library of Munich, Germany.
    4. Ginn, William & Pourroy, Marc, 2022. "The contribution of food subsidy policy to monetary policy in India," Economic Modelling, Elsevier, vol. 113(C).
    5. Silu Muduli & Harendra Behera, 2023. "Bank capital and monetary policy transmission in India," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 16(1), pages 32-56, January.
    6. Jamshaid ur Rehman & Khalil Ahmad & Jawaria Arif, 2022. "Transmission Mechanism of Monetary Policy in BRICS Countries: A Comparative Response with the USA," Journal of Policy Research (JPR), Research Foundation for Humanity (RFH), vol. 8(4), pages 23-34, December.
    7. Ajitava Raychaudhuri & Poulomi Roy, 2021. "The Optimal Distribution Rule of Federal Funds to States in India: A Suggested Methodology," South Asian Journal of Macroeconomics and Public Finance, , vol. 10(2), pages 193-225, December.
    8. Shah, Sayar Ahmad & Garg, Bhavesh, 2023. "Testing policy effectiveness during COVID-19: An NK-DSGE analysis," Journal of Asian Economics, Elsevier, vol. 84(C).
    9. Ashima Goyal & Abhishek Kumar, 2020. "A DSGE Model-Based Analysis of the Indian Slowdown," Journal of International Commerce, Economics and Policy (JICEP), World Scientific Publishing Co. Pte. Ltd., vol. 11(01), pages 1-38, April.
    10. Michael Debabrata Patra & Joice John, 2018. "Non-Linear, Asymmetric and TimeVarying Exchange Rate Pass-Through: Recent Evidence from India," Working Papers id:12700, eSocialSciences.
    11. Ebrahimi , Nasrin & Pedram , Mehdi & Mousavi , Mir Hossein, 2020. "The Effect of Central Bank's Monetary Policy on Unemployment and Inflation in Provinces of Iran: A GVAR Approach," Journal of Money and Economy, Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran, vol. 15(1), pages 55-74, January.

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    More about this item

    Keywords

    Multi-sector New Keynesian DSGE models; Terms of trade shocks; Reserve Bank of India; Indian economy; Agricultural procurement;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • Q18 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Policy; Food Policy; Animal Welfare Policy

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