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Estimation of Macro-financial Linkages for the Indian Economy

Shesadri Banerjee, Jayanthi K. Anand and Shashanka Bhide

Journal of Emerging Market Finance, 2021, vol. 20, issue 1, 7-47

Abstract: The widespread impacts of global financial crisis (2008-09) reinstate the need for better assessment of the macro-financial linkages for forecasting and policy evaluation. Our paper contributes to the relevant literature with evidence from the Indian financial sector. Following Castelnuovo (2013), a New Keynesian model with macro-financial linkages is estimated by the Bayesian technique for the sample period 2004: Q3 to 2019: Q1. We find that, in an Emerging Market Economy like India, business cycle leads financial cycle through the channel of expectations. Further, our results show that the linkages are heterogeneous in size depending on the financial market segment and market-specific shocks. JEL Codes: C11, E44, G10

Keywords: Bayesian estimation; business cycle; financial cycle; Granger Causality test; Indian financial sector; macro-financial linkages (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1177/0972652720927856

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