Terms of Trade Shocks and Monetary Policy in India

Chetan Ghate, Sargam Gupta () and Debdulal Mallick

MPRA Paper from University Library of Munich, Germany

Abstract: Central banks in emerging markets 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 countries. The model is characterized by a manufacturing sector and an agricultural sector. The agricultural sector is disaggregated into a food 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 what implications such shocks have 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: 2016-05-09
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Related works:
Journal Article: Terms of Trade Shocks and Monetary Policy in India (2018)
Working Paper: Terms of trade shocks and monetary policy in India (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:71227

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