A Monetary Business Cycle Model for India

Banerjee, S; Basu, P; Ghate, C

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.

Citation

Banerjee, S., Basu, P., & Ghate, C. (2020). A Monetary Business Cycle Model for India. Economic Inquiry, 58(3), 1362-1386. https://doi.org/10.1111/ecin.12855

• Journal Article Type: Article
• Acceptance Date: Sep 18, 2019
• Online Publication Date: Nov 19, 2019
• Publication Date: Jul 31, 2020
• Deposit Date: Sep 20, 2019
• Publicly Available Date: Nov 19, 2020
• Journal: Economic Inquiry
• Print ISSN: 0095-2583
• Electronic ISSN: 1465-7295
• Publisher: Wiley
• Peer Reviewed: Peer Reviewed
• Volume: 58
• Issue: 3
• Pages: 1362-1386
• DOI: https://doi.org/10.1111/ecin.12855
• Public URL: https://durham-repository.worktribe.com/output/1286018