Speaker

Event date

Venue

Abstract

One of the well documented stylized facts on Indian macroeconomy is the weak and incomplete transmission of monetary policy. In view of the empirical evidence from literature (Kletzer, 2012; Mishra et al. 2016), we examine if the frictions of the bank-led credit market can explain such low pass-through of monetary transmission mechanism. We address the research question using a New Keynesian business cycle model with Indian economy specific features of liquidity constrained population, competitive labour market and reserve requirements of the bank. We incorporate a variety of real (TFP, investment specific technological change, and fiscal policy) and nominal (interest rate shock) shocks to the prototype economy in order to understand the propagation mechanism and quantify the variance decomposition of shocks. Combining the methods of calibration and estimation, the baseline parameterization is configured and validated with second order moments of the data. Our model identifies the critical role of financial frictions in the transmission process, and explains the co-movements of interest rates, incomplete pass-through and adjustment mechanism of the real, nominal and financial variables for a positive interest rate shock. 

Contact email