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Money and business cycle: Evidence from India

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  • Ashima Goyal

    (Indira Gandhi Institute of Development Research)

  • Abhishek Kumar

    (Indira Gandhi Institute of Development Research)

Abstract

In this paper we take a New Keynesian model with non-separable money in utility to Indian data using maximum likelihood. The identification problem in isolating the effect of money on output and inflation is solved by adjusting real balances for shifts in money demand. Estimates with an extended model with relevant features like partial indexation in prices, markup shock and time varying inflation target, show that real balances do affect output and inflation even after correcting for money demand unlike results for the United States and Eurozone. A regression estimate and multivariate structural vector autoregression give similar results. Types of money matter. Reserve money has the largest impact, pointing to the importance of the informal sector. The estimated income elasticity of narrow money is more than twice that of broad money, pointing to the dependence of firms on banks. Interest semi elasticity of money demand is close to one. Responsiveness of output to real interest rate is high. We find that interest rate setting is quite persistent. Coefficient of lagged interest rate varies from 0.71 to 0.95. We conclude that there is a significant asymmetry in the role of money in India (an emerging economy) in comparison to United States and Eurozone (advanced economies).

Suggested Citation

  • Ashima Goyal & Abhishek Kumar, 2018. "Money and business cycle: Evidence from India," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2018-020, Indira Gandhi Institute of Development Research, Mumbai, India.
    • Handle: RePEc:ind:igiwpp:2018-020
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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. Goyal, Ashima & Parab, Prashant, 2021. "What influences aggregate inflation expectations of households in India?," Journal of Asian Economics, Elsevier, vol. 72(C).
    3. Xue, Wenjun & Zhang, Liwen, 2019. "Revisiting the asymmetric effects of bank credit on the business cycle: A panel quantile regression approach," The Journal of Economic Asymmetries, Elsevier, vol. 20(C).

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    More about this item

    Keywords

    India; IS; LM; Money Demand; Maximum Likelihood; Inflation; Monetary Policy; Supply Shock;
    All these keywords.

    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
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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