Terms of Trade Shocks and Monetary Policy in India

Chetan Ghate, Sargam Gupta () and Debdulal Mallick
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Sargam Gupta: Indian Statistical Institute, Delhi

Computational Economics, 2018, vol. 51, issue 1, No 3, 75-121

Abstract: 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.

Keywords: Multi-sector New Keynesian DSGE models; Terms of trade shocks; Reserve Bank of India; Indian economy; Agricultural procurement (search for similar items in EconPapers)
JEL-codes: E31 E52 E58 Q18 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (10)

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Working Paper: Terms of trade shocks and monetary policy in India (2016)
Working Paper: Terms of Trade Shocks and Monetary Policy in India (2016)
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DOI: 10.1007/s10614-016-9630-z

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